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

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.' 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 can see that Mycronic AB (publ) (STO:MYCR) does use debt in its business. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

See our latest analysis for Mycronic

What Is Mycronic's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2023 Mycronic had debt of kr165.0m, up from kr118.0m in one year. However, it does have kr1.63b in cash offsetting this, leading to net cash of kr1.47b.

How Healthy Is Mycronic's Balance Sheet?

According to the last reported balance sheet, Mycronic had liabilities of kr2.43b due within 12 months, and liabilities of kr536.0m due beyond 12 months. Offsetting this, it had kr1.63b in cash and kr1.20b in receivables that were due within 12 months. So it has liabilities totalling kr137.0m more than its cash and near-term receivables, combined.

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 kr22.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Mycronic also has more cash than debt, so we're pretty confident it can manage its debt safely.

The good news is that Mycronic has increased its EBIT by 5.5% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Mycronic may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Mycronic actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

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 kr1.47b. The cherry on top was that in converted 110% of that EBIT to free cash flow, bringing in kr1.3b. So is Mycronic's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Mycronic has 1 warning sign we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.