Is Maison Solutions (NASDAQ:MSS) Using Debt In A Risky Way?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Maison Solutions Inc. (NASDAQ:MSS) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 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, 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. 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 Maison Solutions

How Much Debt Does Maison Solutions Carry?

As you can see below, Maison Solutions had US$2.88m of debt at January 2024, down from US$3.03m a year prior. However, its balance sheet shows it holds US$9.41m in cash, so it actually has US$6.53m net cash.

How Healthy Is Maison Solutions' Balance Sheet?

We can see from the most recent balance sheet that Maison Solutions had liabilities of US$6.60m falling due within a year, and liabilities of US$24.0m due beyond that. Offsetting this, it had US$9.41m in cash and US$2.19m in receivables that were due within 12 months. So its liabilities total US$19.0m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of US$23.8m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, Maison Solutions also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Maison Solutions will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Maison Solutions wasn't profitable at an EBIT level, but managed to grow its revenue by 6.1%, to US$55m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Maison Solutions?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Maison Solutions had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$4.1m and booked a US$231k accounting loss. Given it only has net cash of US$6.53m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Maison Solutions you should be aware of.

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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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.