Mycronic (STO:MYCR) Could Easily Take On More Debt

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.' 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. As with many other companies Mycronic AB (publ) (STO:MYCR) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Mycronic

What Is Mycronic's Debt?

As you can see below, at the end of March 2023, Mycronic had kr179.0m of debt, up from kr66.0m a year ago. Click the image for more detail. However, it does have kr1.59b in cash offsetting this, leading to net cash of kr1.41b.

How Healthy Is Mycronic's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Mycronic had liabilities of kr2.15b due within 12 months and liabilities of kr561.0m due beyond that. On the other hand, it had cash of kr1.59b and kr1.34b worth of receivables due within a year. So it actually has kr212.0m more liquid assets than total liabilities.

This state of affairs indicates that Mycronic's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the kr26.1b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Mycronic has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that Mycronic has increased its EBIT by 9.7% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Mycronic's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 91% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Mycronic has net cash of kr1.41b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of kr1.1b, being 91% of its EBIT. So is Mycronic's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Mycronic , and understanding them should be part of your investment process.

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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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.