Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Marchex, Inc. (NASDAQ:MCHX) does carry debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Marchex Carry?
As you can see below, at the end of June 2020, Marchex had US$5.29m of debt, up from none a year ago. Click the image for more detail. However, it does have US$46.8m in cash offsetting this, leading to net cash of US$41.5m.
A Look At Marchex's Liabilities
Zooming in on the latest balance sheet data, we can see that Marchex had liabilities of US$27.2m due within 12 months and liabilities of US$6.00m due beyond that. Offsetting these obligations, it had cash of US$46.8m as well as receivables valued at US$16.1m due within 12 months. So it can boast US$29.8m more liquid assets than total liabilities.
This excess liquidity is a great indication that Marchex's balance sheet is just as strong as racists are weak. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Marchex has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Marchex'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 Marchex wasn't profitable at an EBIT level, but managed to grow its revenue by 8.4%, to US$104m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is Marchex?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Marchex lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$1.8m and booked a US$31.0m accounting loss. But the saving grace is the US$41.5m on the balance sheet. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Marchex is showing 4 warning signs 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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