Would Marlborough Wine Estates Group (NZSE:MWE) Be Better Off With Less Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Marlborough Wine Estates Group Limited (NZSE:MWE) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Marlborough Wine Estates Group

How Much Debt Does Marlborough Wine Estates Group Carry?

As you can see below, Marlborough Wine Estates Group had NZ$6.80m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have NZ$357.8k in cash offsetting this, leading to net debt of about NZ$6.44m.

How Strong Is Marlborough Wine Estates Group's Balance Sheet?

We can see from the most recent balance sheet that Marlborough Wine Estates Group had liabilities of NZ$7.67m falling due within a year, and liabilities of NZ$2.34m due beyond that. Offsetting this, it had NZ$357.8k in cash and NZ$505.9k in receivables that were due within 12 months. So it has liabilities totalling NZ$9.15m more than its cash and near-term receivables, combined.

Given Marlborough Wine Estates Group has a market capitalization of NZ$174.5m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Marlborough Wine Estates Group'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, Marlborough Wine Estates Group reported revenue of NZ$6.8m, which is a gain of 13%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Marlborough Wine Estates Group had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at NZ$135k. 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. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of NZ$398k and the profit of NZ$181k. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. 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. Be aware that Marlborough Wine Estates Group is showing 4 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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