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.' 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. As with many other companies Moa Group Limited (NZSE:MOA) makes use of debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Moa Group
How Much Debt Does Moa Group Carry?
You can click the graphic below for the historical numbers, but it shows that Moa Group had NZ$7.43m of debt in September 2020, down from NZ$9.64m, one year before. However, it does have NZ$3.69m in cash offsetting this, leading to net debt of about NZ$3.75m.
A Look At Moa Group's Liabilities
According to the last reported balance sheet, Moa Group had liabilities of NZ$9.06m due within 12 months, and liabilities of NZ$14.5m due beyond 12 months. On the other hand, it had cash of NZ$3.69m and NZ$2.05m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NZ$17.8m.
Moa Group has a market capitalization of NZ$33.6m, 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 you can't view debt in total isolation; since Moa Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Moa Group wasn't profitable at an EBIT level, but managed to grow its revenue by 12%, to NZ$26m. We usually like to see faster growth from unprofitable companies, but each to their own.
Caveat Emptor
Over the last twelve months Moa Group produced an earnings before interest and tax (EBIT) loss. Indeed, it lost NZ$894k 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. We would feel better if it turned its trailing twelve month loss of NZ$2.9m into a profit. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - Moa Group has 4 warning signs (and 2 which are concerning) 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.
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This article by Simply Wall St is general in nature. 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 NZSE:SVR
Mediocre balance sheet and slightly overvalued.
