Magseis Fairfield (OB:MSEIS) Is Making Moderate Use Of 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 Magseis Fairfield ASA (OB:MSEIS) 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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Magseis Fairfield

What Is Magseis Fairfield's Debt?

The image below, which you can click on for greater detail, shows that Magseis Fairfield had debt of US$31.4m at the end of December 2021, a reduction from US$32.9m over a year. However, it does have US$29.7m in cash offsetting this, leading to net debt of about US$1.69m.

A Look At Magseis Fairfield's Liabilities

The latest balance sheet data shows that Magseis Fairfield had liabilities of US$101.2m due within a year, and liabilities of US$42.3m falling due after that. On the other hand, it had cash of US$29.7m and US$72.5m worth of receivables due within a year. So it has liabilities totalling US$41.2m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Magseis Fairfield is worth US$129.1m, 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. But either way, Magseis Fairfield has virtually no net debt, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Magseis Fairfield can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Magseis Fairfield wasn't profitable at an EBIT level, but managed to grow its revenue by 33%, to US$258m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Magseis Fairfield managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost a very considerable US$19m 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. Another cause for caution is that is bled US$6.1m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Magseis Fairfield insider transactions.

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.