Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
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.’ 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 Mackmyra Svensk Whisky AB (publ) (STO:MACK B) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Mackmyra Svensk Whisky Carry?
As you can see below, Mackmyra Svensk Whisky had kr141.6m of debt, at March 2019, which is about the same the year before. You can click the chart for greater detail. And it doesn’t have much cash, so its net debt is about the same.
How Healthy Is Mackmyra Svensk Whisky’s Balance Sheet?
We can see from the most recent balance sheet that Mackmyra Svensk Whisky had liabilities of kr46.2m falling due within a year, and liabilities of kr146.8m due beyond that. On the other hand, it had cash of kr1.56m and kr22.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr169.2m.
The deficiency here weighs heavily on the kr106.9m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Mackmyra Svensk Whisky would probably need a major re-capitalization if its creditors were to demand repayment. Because it carries more debt than cash, we think it’s worth watching Mackmyra Svensk Whisky’s balance sheet over time. There’s no doubt that we learn most about debt from the balance sheet. But you can’t view debt in total isolation; since Mackmyra Svensk Whisky 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 Mackmyra Svensk Whisky managed to grow its revenue by 4.1%, to kr86m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Over the last twelve months Mackmyra Svensk Whisky produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping kr11m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of kr19m over the last twelve months. So suffice it to say we consider the stock to be risky. For riskier companies like Mackmyra Svensk Whisky I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.