Moliera2 (WSE:MO2) Has Debt But No Earnings; Should You Worry?

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.' 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 Moliera2 S.A. (WSE:MO2) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

See our latest analysis for Moliera2

What Is Moliera2's Net Debt?

The image below, which you can click on for greater detail, shows that Moliera2 had debt of zł20.5m at the end of September 2023, a reduction from zł22.0m over a year. However, it does have zł1.65m in cash offsetting this, leading to net debt of about zł18.8m.

How Strong Is Moliera2's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Moliera2 had liabilities of zł33.8m due within 12 months and liabilities of zł2.75m due beyond that. Offsetting these obligations, it had cash of zł1.65m as well as receivables valued at zł3.27m due within 12 months. So it has liabilities totalling zł31.6m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of zł34.9m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Moliera2'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.

In the last year Moliera2 had a loss before interest and tax, and actually shrunk its revenue by 22%, to zł96m. To be frank that doesn't bode well.

Caveat Emptor

While Moliera2's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping zł16m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of zł20m. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 4 warning signs with Moliera2 (at least 3 which don't sit too well with us) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.