Is Montrose Environmental Group (NYSE:MEG) Using Too Much 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.' 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. We can see that Montrose Environmental Group, Inc. (NYSE:MEG) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Montrose Environmental Group

What Is Montrose Environmental Group's Debt?

The chart below, which you can click on for greater detail, shows that Montrose Environmental Group had US$166.7m in debt in September 2023; about the same as the year before. However, it also had US$24.8m in cash, and so its net debt is US$141.9m.

A Look At Montrose Environmental Group's Liabilities

The latest balance sheet data shows that Montrose Environmental Group had liabilities of US$134.8m due within a year, and liabilities of US$233.5m falling due after that. On the other hand, it had cash of US$24.8m and US$176.0m worth of receivables due within a year. So its liabilities total US$167.4m more than the combination of its cash and short-term receivables.

Since publicly traded Montrose Environmental Group shares are worth a total of US$993.5m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Montrose Environmental Group 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.

In the last year Montrose Environmental Group wasn't profitable at an EBIT level, but managed to grow its revenue by 9.0%, to US$598m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Montrose Environmental Group produced an earnings before interest and tax (EBIT) loss. Indeed, it lost US$22m 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. We would feel better if it turned its trailing twelve month loss of US$57m into a profit. So we do think this stock is quite risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Montrose Environmental Group is showing 1 warning sign in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.