Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, MPC Container Ships ASA (OB:MPCC) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for MPC Container Ships
What Is MPC Container Ships's Net Debt?
As you can see below, MPC Container Ships had US$283.3m of debt, at March 2021, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has US$32.4m in cash leading to net debt of about US$250.9m.
A Look At MPC Container Ships' Liabilities
Zooming in on the latest balance sheet data, we can see that MPC Container Ships had liabilities of US$26.7m due within 12 months and liabilities of US$274.8m due beyond that. Offsetting this, it had US$32.4m in cash and US$17.4m in receivables that were due within 12 months. So it has liabilities totalling US$251.7m more than its cash and near-term receivables, combined.
Of course, MPC Container Ships has a market capitalization of US$1.29b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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 MPC Container Ships'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 MPC Container Ships's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.
Caveat Emptor
Over the last twelve months MPC Container Ships produced an earnings before interest and tax (EBIT) loss. Indeed, it lost US$25m 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. 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$24m of cash over the last year. So suffice it to say we do 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 instance, we've identified 2 warning signs for MPC Container Ships that you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.
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About OB:MPCC
Flawless balance sheet and good value.
