Here's Why Monnari Trade (WSE:MON) Can Afford Some Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Monnari Trade S.A. (WSE:MON) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Monnari Trade

What Is Monnari Trade's Debt?

As you can see below, at the end of March 2021, Monnari Trade had zł20.2m of debt, up from zł4.14m a year ago. Click the image for more detail. However, it also had zł19.7m in cash, and so its net debt is zł500.0k.

A Look At Monnari Trade's Liabilities

We can see from the most recent balance sheet that Monnari Trade had liabilities of zł60.9m falling due within a year, and liabilities of zł48.3m due beyond that. Offsetting this, it had zł19.7m in cash and zł30.4m in receivables that were due within 12 months. So its liabilities total zł59.1m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of zł78.1m, so it does suggest shareholders should keep an eye on Monnari Trade's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. But either way, Monnari Trade has virtually no net debt, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Monnari Trade'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.

Over 12 months, Monnari Trade made a loss at the EBIT level, and saw its revenue drop to zł198m, which is a fall of 29%. To be frank that doesn't bode well.

Caveat Emptor

While Monnari Trade's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost zł7.3m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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 zł29m into a profit. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with Monnari Trade (including 1 which is potentially serious) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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