Is Marathon Digital Holdings (NASDAQ:MARA) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Marathon Digital Holdings, Inc. (NASDAQ:MARA) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Marathon Digital Holdings

What Is Marathon Digital Holdings's Net Debt?

As you can see below, Marathon Digital Holdings had US$734.2m of debt at June 2023, down from US$765.3m a year prior. On the flip side, it has US$113.7m in cash leading to net debt of about US$620.6m.

How Strong Is Marathon Digital Holdings' Balance Sheet?

According to the last reported balance sheet, Marathon Digital Holdings had liabilities of US$28.3m due within 12 months, and liabilities of US$734.7m due beyond 12 months. Offsetting this, it had US$113.7m in cash and US$759.0k in receivables that were due within 12 months. So its liabilities total US$648.6m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Marathon Digital Holdings has a market capitalization of US$2.13b, 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. 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 Marathon Digital Holdings 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.

Over 12 months, Marathon Digital Holdings made a loss at the EBIT level, and saw its revenue drop to US$174m, which is a fall of 12%. We would much prefer see growth.

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. Indeed, it lost US$112m 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. However, it doesn't help that it burned through US$481m 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. We've identified 5 warning signs with Marathon Digital Holdings (at least 1 which is a bit concerning) , 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.