We Think Marathon Digital Holdings (NASDAQ:MARA) Has A Fair Chunk Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Marathon Digital Holdings, Inc. (NASDAQ:MARA) makes use of debt. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Marathon Digital Holdings

How Much Debt Does Marathon Digital Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Marathon Digital Holdings had US$325.3m of debt in September 2023, down from US$781.2m, one year before. However, it does have US$101.2m in cash offsetting this, leading to net debt of about US$224.1m.

A Look At Marathon Digital Holdings' Liabilities

According to the last reported balance sheet, Marathon Digital Holdings had liabilities of US$38.2m due within 12 months, and liabilities of US$325.7m due beyond 12 months. Offsetting this, it had US$101.2m in cash and US$1.19m in receivables that were due within 12 months. So its liabilities total US$261.4m more than the combination of its cash and short-term receivables.

Given Marathon Digital Holdings has a market capitalization of US$4.23b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 64%, to US$259m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Marathon Digital Holdings still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$86m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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 US$453m in negative free cash flow over the last twelve months. 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. Case in point: We've spotted 4 warning signs for Marathon Digital Holdings you should be aware of, and 1 of them is a bit unpleasant.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.