Is Momentive Global (NASDAQ:MNTV) Using Debt In A Risky Way?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that Momentive Global Inc. (NASDAQ:MNTV) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Momentive Global

What Is Momentive Global's Net Debt?

The chart below, which you can click on for greater detail, shows that Momentive Global had US$212.7m in debt in June 2021; about the same as the year before. However, it does have US$283.2m in cash offsetting this, leading to net cash of US$70.5m.

A Look At Momentive Global's Liabilities

According to the last reported balance sheet, Momentive Global had liabilities of US$269.8m due within 12 months, and liabilities of US$297.2m due beyond 12 months. On the other hand, it had cash of US$283.2m and US$22.5m worth of receivables due within a year. So it has liabilities totalling US$261.4m more than its cash and near-term receivables, combined.

Since publicly traded Momentive Global shares are worth a total of US$3.62b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Momentive Global also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 Momentive Global 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 Momentive Global wasn't profitable at an EBIT level, but managed to grow its revenue by 19%, to US$408m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Momentive Global?

While Momentive Global lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$64m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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 instance, we've identified 4 warning signs for Momentive Global that you should be aware of.

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.

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.

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