We Think Magnite (NASDAQ:MGNI) Has A Fair Chunk Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Magnite, Inc. (NASDAQ:MGNI) does have debt on its balance sheet. 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 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 examine debt levels, we first consider both cash and debt levels, together.

Our analysis indicates that MGNI is potentially undervalued!

What Is Magnite's Net Debt?

The chart below, which you can click on for greater detail, shows that Magnite had US$725.0m in debt in June 2022; about the same as the year before. However, it also had US$233.1m in cash, and so its net debt is US$491.9m.

A Look At Magnite's Liabilities

We can see from the most recent balance sheet that Magnite had liabilities of US$1.00b falling due within a year, and liabilities of US$798.9m due beyond that. Offsetting this, it had US$233.1m in cash and US$886.1m in receivables that were due within 12 months. So its liabilities total US$681.8m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of US$981.1m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Magnite can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Magnite wasn't profitable at an EBIT level, but managed to grow its revenue by 73%, to US$549m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Magnite still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$73m 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. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of US$93m into a profit. So in short it's a really risky stock. 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 1 warning sign for Magnite that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.