Is Marshall Motor Holdings (LON:MMH) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 can see that Marshall Motor Holdings plc (LON:MMH) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Marshall Motor Holdings

What Is Marshall Motor Holdings's Net Debt?

As you can see below, Marshall Motor Holdings had UK£4.70m of debt at June 2021, down from UK£5.34m a year prior. But it also has UK£61.9m in cash to offset that, meaning it has UK£57.2m net cash.

A Look At Marshall Motor Holdings' Liabilities

According to the last reported balance sheet, Marshall Motor Holdings had liabilities of UK£492.4m due within 12 months, and liabilities of UK£124.0m due beyond 12 months. Offsetting this, it had UK£61.9m in cash and UK£98.7m in receivables that were due within 12 months. So it has liabilities totalling UK£455.8m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the UK£179.2m 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 definitely think shareholders need to watch this one closely. 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. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

In the last year Marshall Motor Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 30%, to UK£2.6b. Shareholders probably have their fingers crossed that it can grow its way to profits.

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£50m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. One positive was the revenue growth of 30% over the last year. But the stock still looks risky to us. 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. We've identified 3 warning signs with Marshall Motor Holdings (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.
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