Mercer International (NASDAQ:MERC) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Mercer International Inc. (NASDAQ:MERC) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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, 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.

See our latest analysis for Mercer International

How Much Debt Does Mercer International Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Mercer International had US$1.55b of debt, an increase on US$1.30b, over one year. On the flip side, it has US$343.7m in cash leading to net debt of about US$1.21b.

A Look At Mercer International's Liabilities

We can see from the most recent balance sheet that Mercer International had liabilities of US$267.9m falling due within a year, and liabilities of US$1.72b due beyond that. Offsetting these obligations, it had cash of US$343.7m as well as receivables valued at US$266.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.38b.

The deficiency here weighs heavily on the US$580.3m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Mercer International would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Mercer International 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.

Over 12 months, Mercer International made a loss at the EBIT level, and saw its revenue drop to US$2.1b, which is a fall of 5.0%. We would much prefer see growth.

Caveat Emptor

Importantly, Mercer International had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping US$122m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through US$170m 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. Be aware that Mercer International is showing 2 warning signs in our investment analysis , 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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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.