Here's Why MRC Global (NYSE:MRC) Can Afford Some Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that MRC Global Inc. (NYSE:MRC) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for MRC Global

How Much Debt Does MRC Global Carry?

You can click the graphic below for the historical numbers, but it shows that MRC Global had US$382.0m of debt in March 2021, down from US$521.0m, one year before. On the flip side, it has US$132.0m in cash leading to net debt of about US$250.0m.

How Strong Is MRC Global's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that MRC Global had liabilities of US$563.0m due within 12 months and liabilities of US$565.0m due beyond that. Offsetting this, it had US$132.0m in cash and US$369.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$627.0m.

This deficit is considerable relative to its market capitalization of US$962.8m, so it does suggest shareholders should keep an eye on MRC Global's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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 MRC Global'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.

In the last year MRC Global had a loss before interest and tax, and actually shrunk its revenue by 32%, to US$2.4b. To be frank that doesn't bode well.

Caveat Emptor

Not only did MRC Global's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at US$7.0m. 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. We would feel better if it turned its trailing twelve month loss of US$310m into a profit. In the meantime, we consider the stock very risky. 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. Be aware that MRC Global is showing 1 warning sign in our investment analysis , you should know about...

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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