Stock Analysis

Would Mercury Systems (NASDAQ:MRCY) Be Better Off With Less Debt?

NasdaqGS:MRCY
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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. Importantly, Mercury Systems, Inc. (NASDAQ:MRCY) does carry 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

View our latest analysis for Mercury Systems

What Is Mercury Systems's Debt?

The chart below, which you can click on for greater detail, shows that Mercury Systems had US$601.1m in debt in September 2024; about the same as the year before. On the flip side, it has US$158.1m in cash leading to net debt of about US$443.0m.

debt-equity-history-analysis
NasdaqGS:MRCY Debt to Equity History January 30th 2025

How Strong Is Mercury Systems' Balance Sheet?

The latest balance sheet data shows that Mercury Systems had liabilities of US$232.8m due within a year, and liabilities of US$676.3m falling due after that. Offsetting these obligations, it had cash of US$158.1m as well as receivables valued at US$422.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$328.2m.

Given Mercury Systems has a market capitalization of US$2.46b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Mercury Systems made a loss at the EBIT level, and saw its revenue drop to US$859m, which is a fall of 7.5%. We would much prefer see growth.

Caveat Emptor

Importantly, Mercury Systems had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$101m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of US$118m into a profit. So to be blunt we do think it is risky. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Mercury Systems insider transactions.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.

About NasdaqGS:MRCY

Mercury Systems

A technology company, manufactures and sells components, products, modules, and subsystems for defense prime contractors, the U.S.

Adequate balance sheet and slightly overvalued.