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 Mackmyra Svensk Whisky AB (publ) (STO:MACK B) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Mackmyra Svensk Whisky’s Debt?
As you can see below, Mackmyra Svensk Whisky had kr141.8m of debt, at June 2019, which is about the same the year before. You can click the chart for greater detail. Net debt is about the same, since the it doesn’t have much cash.
How Strong Is Mackmyra Svensk Whisky’s Balance Sheet?
According to the last reported balance sheet, Mackmyra Svensk Whisky had liabilities of kr50.6m due within 12 months, and liabilities of kr147.1m due beyond 12 months. On the other hand, it had cash of kr876.0k and kr22.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr174.7m.
This deficit casts a shadow over the kr108.0m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Mackmyra Svensk Whisky would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is Mackmyra Svensk Whisky’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.
Over 12 months, Mackmyra Svensk Whisky reported revenue of kr87m, which is a gain of 2.9%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.
Over the last twelve months Mackmyra Svensk Whisky produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at kr11m. 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 kr13m in negative free cash flow over the last year. That means it’s on the risky side of things. 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.
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.
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