Here's Why Marathon Digital Holdings (NASDAQ:MARA) 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.' 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 Marathon Digital Holdings, Inc. (NASDAQ:MARA) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Marathon Digital Holdings

How Much Debt Does Marathon Digital Holdings Carry?

As you can see below, Marathon Digital Holdings had US$733.3m of debt, at March 2023, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has US$124.9m in cash leading to net debt of about US$608.4m.

A Look At Marathon Digital Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Marathon Digital Holdings had liabilities of US$23.8m due within 12 months and liabilities of US$734.2m due beyond that. On the other hand, it had cash of US$124.9m and US$172.0k worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$633.0m.

While this might seem like a lot, it is not so bad since Marathon Digital Holdings has a market capitalization of US$1.54b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Marathon Digital Holdings can strengthen its balance sheet over time. 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 Marathon Digital Holdings had a loss before interest and tax, and actually shrunk its revenue by 42%, to US$117m. To be frank that doesn't bode well.

Caveat Emptor

While Marathon Digital Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping US$353m. 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. However, it doesn't help that it burned through US$534m of cash over the last year. So suffice it to say we consider the stock very risky. 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. For example, we've discovered 3 warning signs for Marathon Digital Holdings (2 are a bit unpleasant!) that you should be aware of before investing here.

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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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.