Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that ‘Volatility is far from synonymous with risk.’ 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. We can see that Magseis Fairfield ASA (OB:MSEIS) does use debt in its business. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Magseis Fairfield’s Debt?
The image below, which you can click on for greater detail, shows that at March 2019 Magseis Fairfield had debt of US$72.0m, up from US$15.8m in one year. However, because it has a cash reserve of US$50.0m, its net debt is less, at about US$22.0m.
How Healthy Is Magseis Fairfield’s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Magseis Fairfield had liabilities of US$190.7m due within 12 months and liabilities of US$69.4m due beyond that. Offsetting these obligations, it had cash of US$50.0m as well as receivables valued at US$131.0m due within 12 months. So its liabilities total US$79.1m more than the combination of its cash and short-term receivables.
Magseis Fairfield has a market capitalization of US$190.4m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it’s clear that we should definitely closely examine whether it can manage its debt without dilution. There’s no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Magseis Fairfield’s ability to maintain a healthy balance sheet going forward. 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 managed to grow its revenue by 199%, to US$231m. So its pretty obvious shareholders are hoping for more growth!
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. To be specific the EBIT loss came in at US$2.3m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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 US$5.9m of cash over the last year. So suffice it to say we do consider the stock to be risky. For riskier companies like Magseis Fairfield I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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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