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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, MIRC Electronics Limited (NSE:MIRCELECTR) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for MIRC Electronics

How Much Debt Does MIRC Electronics Carry?

As you can see below, at the end of March 2024, MIRC Electronics had ₹1.03b of debt, up from ₹793.6m a year ago. Click the image for more detail. However, it also had ₹159.9m in cash, and so its net debt is ₹867.3m.

How Strong Is MIRC Electronics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that MIRC Electronics had liabilities of ₹4.18b due within 12 months and liabilities of ₹234.7m due beyond that. Offsetting these obligations, it had cash of ₹159.9m as well as receivables valued at ₹1.64b due within 12 months. So it has liabilities totalling ₹2.61b more than its cash and near-term receivables, combined.

MIRC Electronics has a market capitalization of ₹4.87b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But it is MIRC Electronics's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, MIRC Electronics made a loss at the EBIT level, and saw its revenue drop to ₹9.7b, which is a fall of 13%. We would much prefer see growth.

Caveat Emptor

While MIRC Electronics's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable ₹537m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₹70m 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. Be aware that MIRC Electronics is showing 3 warning signs in our investment analysis , and 1 of those is significant...

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.