MIRC Electronics (NSE:MIRCELECTR) Is Making Moderate Use Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies MIRC Electronics Limited (NSE:MIRCELECTR) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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.

View 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 2023 MIRC Electronics had ₹973.6m of debt, an increase on ₹772.6m, over one year. However, it also had ₹73.6m in cash, and so its net debt is ₹900.0m.

A Look At MIRC Electronics' Liabilities

The latest balance sheet data shows that MIRC Electronics had liabilities of ₹4.42b due within a year, and liabilities of ₹178.6m falling due after that. Offsetting this, it had ₹73.6m in cash and ₹1.67b in receivables that were due within 12 months. So it has liabilities totalling ₹2.86b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of ₹4.35b, so it does suggest shareholders should keep an eye on MIRC Electronics' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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 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.

In the last year MIRC Electronics had a loss before interest and tax, and actually shrunk its revenue by 30%, to ₹8.7b. To be frank that doesn't bode well.

Caveat Emptor

Not only did MIRC Electronics's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at ₹135m. 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 ₹83m of cash over the last year. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for MIRC Electronics (of which 2 don't sit too well with us!) you should know about.

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.