Is Magnite (NASDAQ:MGNI) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Magnite, Inc. (NASDAQ:MGNI) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Magnite

How Much Debt Does Magnite Carry?

You can click the graphic below for the historical numbers, but it shows that Magnite had US$677.6m of debt in March 2023, down from US$724.3m, one year before. However, it does have US$236.6m in cash offsetting this, leading to net debt of about US$441.1m.

How Healthy Is Magnite's Balance Sheet?

According to the last reported balance sheet, Magnite had liabilities of US$982.4m due within 12 months, and liabilities of US$742.3m due beyond 12 months. On the other hand, it had cash of US$236.6m and US$875.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$612.8m.

While this might seem like a lot, it is not so bad since Magnite has a market capitalization of US$1.96b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Magnite'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 Magnite wasn't profitable at an EBIT level, but managed to grow its revenue by 12%, to US$589m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Magnite had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$165m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of US$184m into a profit. So in short it's a really risky stock. 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. We've identified 3 warning signs with Magnite , and understanding them should be part of your investment process.

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.