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

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Marlborough Wine Estates Group Limited (NZSE:MWE) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Marlborough Wine Estates Group

What Is Marlborough Wine Estates Group's Debt?

The chart below, which you can click on for greater detail, shows that Marlborough Wine Estates Group had NZ$6.65m in debt in June 2021; about the same as the year before. On the flip side, it has NZ$1.73m in cash leading to net debt of about NZ$4.92m.

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

According to the last reported balance sheet, Marlborough Wine Estates Group had liabilities of NZ$1.52m due within 12 months, and liabilities of NZ$9.08m due beyond 12 months. Offsetting this, it had NZ$1.73m in cash and NZ$860.9k in receivables that were due within 12 months. So it has liabilities totalling NZ$8.01m more than its cash and near-term receivables, combined.

Since publicly traded Marlborough Wine Estates Group shares are worth a total of NZ$74.1m, it seems unlikely that this level of liabilities would be a major 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Marlborough Wine Estates Group wasn't profitable at an EBIT level, but managed to grow its revenue by 5.2%, to NZ$6.7m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Marlborough Wine Estates Group produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at NZ$884k. 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. For example, we would not want to see a repeat of last year's loss of NZ$616k. So we do think this stock is quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Marlborough Wine Estates Group you should know about.

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.

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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