Does Marshall Monteagle (JSE:MMP) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Marshall Monteagle PLC (JSE:MMP) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Marshall Monteagle

How Much Debt Does Marshall Monteagle Carry?

As you can see below, Marshall Monteagle had US$19.5m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$29.7m in cash, leading to a US$10.2m net cash position.

How Strong Is Marshall Monteagle's Balance Sheet?

The latest balance sheet data shows that Marshall Monteagle had liabilities of US$28.8m due within a year, and liabilities of US$14.4m falling due after that. Offsetting this, it had US$29.7m in cash and US$23.3m in receivables that were due within 12 months. So it actually has US$9.80m more liquid assets than total liabilities.

This surplus suggests that Marshall Monteagle is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Marshall Monteagle has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Marshall Monteagle's load is not too heavy, because its EBIT was down 87% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is Marshall Monteagle's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Marshall Monteagle may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Marshall Monteagle's free cash flow amounted to 35% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to investigate a company's debt, in this case Marshall Monteagle has US$10.2m in net cash and a decent-looking balance sheet. So we are not troubled with Marshall Monteagle's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Marshall Monteagle has 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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. 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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