Here's Why MYT Netherlands Parent B.V (NYSE:MYTE) Can Afford Some Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies MYT Netherlands Parent B.V. (NYSE:MYTE) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for MYT Netherlands Parent B.V

What Is MYT Netherlands Parent B.V's Net Debt?

As you can see below, at the end of March 2024, MYT Netherlands Parent B.V had €26.1m of debt, up from €4.90m a year ago. Click the image for more detail. However, it does have €10.6m in cash offsetting this, leading to net debt of about €15.5m.

How Strong Is MYT Netherlands Parent B.V's Balance Sheet?

According to the last reported balance sheet, MYT Netherlands Parent B.V had liabilities of €194.3m due within 12 months, and liabilities of €45.5m due beyond 12 months. On the other hand, it had cash of €10.6m and €15.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €214.2m.

This deficit is considerable relative to its market capitalization of €287.8m, so it does suggest shareholders should keep an eye on MYT Netherlands Parent B.V's use of debt. 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 it is future earnings, more than anything, that will determine MYT Netherlands Parent B.V'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, MYT Netherlands Parent B.V reported revenue of €822m, which is a gain of 11%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months MYT Netherlands Parent B.V produced an earnings before interest and tax (EBIT) loss. Indeed, it lost €8.7m 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. Another cause for caution is that is bled €12m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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. We've identified 1 warning sign with MYT Netherlands Parent B.V , 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.