Mercury Systems (NASDAQ:MRCY) Is Making Moderate Use Of Debt

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. As with many other companies Mercury Systems, Inc. (NASDAQ:MRCY) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Mercury Systems

How Much Debt Does Mercury Systems Carry?

As you can see below, at the end of June 2023, Mercury Systems had US$511.5m of debt, up from US$451.5m a year ago. Click the image for more detail. On the flip side, it has US$71.6m in cash leading to net debt of about US$439.9m.

How Healthy Is Mercury Systems' Balance Sheet?

The latest balance sheet data shows that Mercury Systems had liabilities of US$233.3m due within a year, and liabilities of US$591.4m falling due after that. Offsetting this, it had US$71.6m in cash and US$507.3m in receivables that were due within 12 months. So it has liabilities totalling US$245.8m more than its cash and near-term receivables, combined.

Since publicly traded Mercury Systems shares are worth a total of US$2.20b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Mercury Systems can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Mercury Systems saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

Caveat Emptor

Importantly, Mercury Systems had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$6.3m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$60m of cash over the last year. So to be blunt we think it is 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. For example - Mercury Systems has 1 warning sign we think you should be aware of.

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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