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.' 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. We can see that Marchex, Inc. (NASDAQ:MCHX) does use debt in its business. But is this debt a concern to shareholders?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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.
What Is Marchex's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2020 Marchex had US$5.29m of debt, an increase on none, over one year. However, it does have US$46.8m in cash offsetting this, leading to net cash of US$41.5m.
How Healthy Is Marchex's Balance Sheet?
According to the last reported balance sheet, Marchex had liabilities of US$27.2m due within 12 months, and liabilities of US$6.00m due beyond 12 months. Offsetting this, it had US$46.8m in cash and US$16.1m in receivables that were 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. Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Succinctly put, Marchex boasts net cash, so it's fair to say it does not have a heavy debt load! 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.
Over 12 months, Marchex reported revenue of US$104m, which is a gain of 8.4%, although it did not report any earnings before interest and tax. 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?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Marchex had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$1.8m of cash and made a loss of US$31.0m. While this does make the company a bit risky, it's important to remember it has net cash of US$41.5m. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for Marchex that you should be aware of before investing here.
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. 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.
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