Here's Why Mycronic (STO:MYCR) Can Manage Its Debt Responsibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Mycronic AB (publ) (STO:MYCR) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Our analysis indicates that MYCR is potentially overvalued!

What Is Mycronic's Net Debt?

The image below, which you can click on for greater detail, shows that Mycronic had debt of kr267.0m at the end of September 2022, a reduction from kr565.0m over a year. However, its balance sheet shows it holds kr906.0m in cash, so it actually has kr639.0m net cash.

How Strong Is Mycronic's Balance Sheet?

The latest balance sheet data shows that Mycronic had liabilities of kr1.95b due within a year, and liabilities of kr556.0m falling due after that. On the other hand, it had cash of kr906.0m and kr1.28b worth of receivables due within a year. So its liabilities total kr320.0m more than the combination of its cash and short-term receivables.

Having regard to Mycronic's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the kr19.3b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Mycronic boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Mycronic's load is not too heavy, because its EBIT was down 27% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Mycronic can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Mycronic has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Mycronic generated free cash flow amounting to a very robust 82% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

We could understand if investors are concerned about Mycronic's liabilities, but we can be reassured by the fact it has has net cash of kr639.0m. And it impressed us with free cash flow of kr516m, being 82% of its EBIT. So we don't have any problem with Mycronic's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Mycronic , and understanding them should be part of your investment process.

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.