MIRC Electronics (NSE:MIRCELECTR) Is Making Moderate Use Of 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 MIRC Electronics Limited (NSE:MIRCELECTR) makes use of debt. But is this debt a concern to shareholders?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for MIRC Electronics

What Is MIRC Electronics's Debt?

The image below, which you can click on for greater detail, shows that at March 2023 MIRC Electronics had debt of ₹793.6m, up from ₹677.0m in one year. However, it does have ₹38.7m in cash offsetting this, leading to net debt of about ₹754.9m.

How Healthy Is MIRC Electronics' Balance Sheet?

The latest balance sheet data shows that MIRC Electronics had liabilities of ₹3.18b due within a year, and liabilities of ₹203.7m falling due after that. Offsetting these obligations, it had cash of ₹38.7m as well as receivables valued at ₹914.4m due within 12 months. So it has liabilities totalling ₹2.43b more than its cash and near-term receivables, combined.

This deficit isn't so bad because MIRC Electronics is worth ₹4.38b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since MIRC Electronics will need earnings to service that debt. 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 ₹11b, which is a fall of 6.9%. 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 ₹19m. 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. However, it doesn't help that it burned through ₹92m of cash over the last year. So to be blunt we think it is 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. To that end, you should learn about the 4 warning signs we've spotted with MIRC Electronics (including 2 which are a bit concerning) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.