Health Check: How Prudently Does musicMagpie (LON:MMAG) Use Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that musicMagpie plc (LON:MMAG) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for musicMagpie

What Is musicMagpie's Net Debt?

The chart below, which you can click on for greater detail, shows that musicMagpie had UK£18.4m in debt in May 2024; about the same as the year before. However, it does have UK£4.57m in cash offsetting this, leading to net debt of about UK£13.8m.

How Strong Is musicMagpie's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that musicMagpie had liabilities of UK£7.75m due within 12 months and liabilities of UK£20.6m due beyond that. On the other hand, it had cash of UK£4.57m and UK£2.23m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£21.5m.

This deficit casts a shadow over the UK£6.16m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, musicMagpie would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since musicMagpie will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, musicMagpie made a loss at the EBIT level, and saw its revenue drop to UK£128m, which is a fall of 5.5%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months musicMagpie produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping UK£2.1m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it lost UK£6.9m in just last twelve months, and it doesn't have much by way of liquid assets. So while it's not wise to assume the company will fail, we do think it's risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for musicMagpie you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com