Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Maxar Technologies Inc. (NYSE:MAXR) does carry debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Maxar Technologies's Debt?
You can click the graphic below for the historical numbers, but it shows that Maxar Technologies had US$2.48b of debt in September 2020, down from US$3.23b, one year before. However, it also had US$60.0m in cash, and so its net debt is US$2.42b.
How Strong Is Maxar Technologies' Balance Sheet?
The latest balance sheet data shows that Maxar Technologies had liabilities of US$673.0m due within a year, and liabilities of US$2.89b falling due after that. Offsetting this, it had US$60.0m in cash and US$361.0m in receivables that were due within 12 months. So it has liabilities totalling US$3.15b more than its cash and near-term receivables, combined.
Given this deficit is actually higher than the company's market capitalization of US$2.56b, we think shareholders really should watch Maxar Technologies's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Maxar Technologies 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.
In the last year Maxar Technologies wasn't profitable at an EBIT level, but managed to grow its revenue by 18%, to US$1.7b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Importantly, Maxar Technologies had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$14m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through US$32m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Maxar Technologies has 5 warning signs (and 2 which make us uncomfortable) we think you should know about.
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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