Is Mackmyra Svensk Whisky (STO:MACK B) Using Debt In A Risky Way?

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, Mackmyra Svensk Whisky AB (publ) (STO:MACK B) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Mackmyra Svensk Whisky

What Is Mackmyra Svensk Whisky's Net Debt?

As you can see below, at the end of December 2020, Mackmyra Svensk Whisky had kr154.5m of debt, up from kr127.3m a year ago. Click the image for more detail. On the flip side, it has kr8.35m in cash leading to net debt of about kr146.2m.

How Strong Is Mackmyra Svensk Whisky's Balance Sheet?

We can see from the most recent balance sheet that Mackmyra Svensk Whisky had liabilities of kr37.2m falling due within a year, and liabilities of kr154.5m due beyond that. Offsetting this, it had kr8.35m in cash and kr23.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr160.3m.

When you consider that this deficiency exceeds the company's kr145.4m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. 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's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Over the last twelve months Mackmyra Svensk Whisky produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable kr19m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through kr4.7m in negative free cash flow over the last year. So suffice it to say we consider the stock to be 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. We've identified 1 warning sign with Mackmyra Svensk Whisky , 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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