Does Marshall Motor Holdings (LON:MMH) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Marshall Motor Holdings Plc (LON:MMH) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Marshall Motor Holdings

What Is Marshall Motor Holdings's Debt?

As you can see below, Marshall Motor Holdings had UK£5.02m of debt at December 2020, down from UK£30.7m a year prior. However, it does have UK£33.8m in cash offsetting this, leading to net cash of UK£28.8m.

How Strong Is Marshall Motor Holdings' Balance Sheet?

According to the last reported balance sheet, Marshall Motor Holdings had liabilities of UK£505.0m due within 12 months, and liabilities of UK£122.0m due beyond 12 months. Offsetting this, it had UK£33.8m in cash and UK£60.0m in receivables that were due within 12 months. So it has liabilities totalling UK£533.2m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the UK£133.0m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Marshall Motor Holdings would likely require a major re-capitalisation if it had to pay its creditors today. Marshall Motor Holdings boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Marshall Motor Holdings's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Marshall Motor Holdings made a loss at the EBIT level, and saw its revenue drop to UK£2.2b, which is a fall of 5.3%. We would much prefer see growth.

So How Risky Is Marshall Motor Holdings?

While Marshall Motor Holdings lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of UK£14m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Given the lack of transparency around future revenue (and cashflow), we're nervous about this one, until it makes its first big sales. To us, it is a high risk play. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Marshall Motor Holdings is showing 1 warning sign in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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