Would Mevaco (ATH:MEVA) Be Better Off With Less Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Mevaco S.A. (ATH:MEVA) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Mevaco

What Is Mevaco's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Mevaco had debt of €5.23m, up from €3.86m in one year. However, it also had €2.93m in cash, and so its net debt is €2.30m.

How Healthy Is Mevaco's Balance Sheet?

The latest balance sheet data shows that Mevaco had liabilities of €6.56m due within a year, and liabilities of €3.97m falling due after that. Offsetting these obligations, it had cash of €2.93m as well as receivables valued at €4.04m due within 12 months. So it has liabilities totalling €3.56m more than its cash and near-term receivables, combined.

Given Mevaco has a market capitalization of €19.2m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Mevaco will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Mevaco made a loss at the EBIT level, and saw its revenue drop to €8.9m, which is a fall of 41%. To be frank that doesn't bode well.

Caveat Emptor

While Mevaco's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at €341k. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of €539k into a profit. So we do think this stock is quite risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Mevaco has 1 warning sign we think you should be aware of.

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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