MP Materials (NYSE:MP) Has A Somewhat Strained Balance Sheet

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies MP Materials Corp. (NYSE:MP) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for MP Materials

What Is MP Materials's Debt?

As you can see below, MP Materials had US$686.4m of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. But it also has US$1.08b in cash to offset that, meaning it has US$398.2m net cash.

How Strong Is MP Materials' Balance Sheet?

We can see from the most recent balance sheet that MP Materials had liabilities of US$97.0m falling due within a year, and liabilities of US$849.1m due beyond that. On the other hand, it had cash of US$1.08b and US$17.3m worth of receivables due within a year. So it actually has US$155.8m more liquid assets than total liabilities.

This short term liquidity is a sign that MP Materials could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, MP Materials boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that MP Materials's load is not too heavy, because its EBIT was down 80% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine MP Materials'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While MP Materials has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, MP Materials burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case MP Materials has US$398.2m in net cash and a decent-looking balance sheet. So although we see some areas for improvement, we're not too worried about MP Materials's balance sheet. 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. To that end, you should learn about the 2 warning signs we've spotted with MP Materials (including 1 which shouldn't be ignored) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.