Is Mercantile Ports & Logistics (LON:MPL) Weighed On By Its Debt Load?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Mercantile Ports & Logistics Limited (LON:MPL) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Mercantile Ports & Logistics

What Is Mercantile Ports & Logistics's Net Debt?

The image below, which you can click on for greater detail, shows that Mercantile Ports & Logistics had debt of UK£40.2m at the end of June 2023, a reduction from UK£44.0m over a year. On the flip side, it has UK£7.63m in cash leading to net debt of about UK£32.5m.

How Healthy Is Mercantile Ports & Logistics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Mercantile Ports & Logistics had liabilities of UK£16.6m due within 12 months and liabilities of UK£36.9m due beyond that. On the other hand, it had cash of UK£7.63m and UK£568.0k worth of receivables due within a year. So its liabilities total UK£45.3m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the UK£10.3m 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, Mercantile Ports & Logistics would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Mercantile Ports & Logistics can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Mercantile Ports & Logistics wasn't profitable at an EBIT level, but managed to grow its revenue by 97%, to UK£5.6m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Mercantile Ports & Logistics managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost a very considerable UK£5.9m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized UK£411k in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. 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. For example, we've discovered 4 warning signs for Mercantile Ports & Logistics (2 are significant!) that you should be aware of before investing here.

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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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.