MIDI (MTSE:MDI) Has Debt But No Earnings; Should You Worry?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 MIDI p.l.c. (MTSE:MDI) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for MIDI

What Is MIDI's Net Debt?

You can click the graphic below for the historical numbers, but it shows that MIDI had €56.7m of debt in June 2022, down from €59.5m, one year before. However, it does have €9.75m in cash offsetting this, leading to net debt of about €46.9m.

How Healthy Is MIDI's Balance Sheet?

We can see from the most recent balance sheet that MIDI had liabilities of €48.9m falling due within a year, and liabilities of €74.1m due beyond that. On the other hand, it had cash of €9.75m and €2.08m worth of receivables due within a year. So it has liabilities totalling €111.2m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the €72.8m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, MIDI would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is MIDI'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, MIDI made a loss at the EBIT level, and saw its revenue drop to €4.3m, which is a fall of 49%. That makes us nervous, to say the least.

Caveat Emptor

Not only did MIDI'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 €194k. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of €5.4m over the last twelve months. So suffice it to say we consider the stock to be 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. For example MIDI has 5 warning signs (and 3 which don't sit too well with us) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.