Is MIRC Electronics (NSE:MIRCELECTR) Using Too Much Debt?

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.' 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 note that MIRC Electronics Limited (NSE:MIRCELECTR) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 MIRC Electronics

What Is MIRC Electronics's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 MIRC Electronics had ₹937.3m of debt, an increase on ₹884.9m, over one year. However, it also had ₹287.0m in cash, and so its net debt is ₹650.3m.

How Healthy Is MIRC Electronics's Balance Sheet?

We can see from the most recent balance sheet that MIRC Electronics had liabilities of ₹2.84b falling due within a year, and liabilities of ₹215.2m due beyond that. Offsetting these obligations, it had cash of ₹287.0m as well as receivables valued at ₹547.3m due within 12 months. So it has liabilities totalling ₹2.22b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of ₹2.85b, so it does suggest shareholders should keep an eye on MIRC Electronics's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is MIRC Electronics's earnings that will influence how the balance sheet holds up in the future. 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, MIRC Electronics made a loss at the EBIT level, and saw its revenue drop to ₹5.5b, which is a fall of 9.9%. We would much prefer see growth.

Caveat Emptor

Importantly, MIRC Electronics had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₹1.3m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of ₹152m. So we do think this stock is quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - MIRC Electronics has 3 warning signs (and 1 which is significant) we think 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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