Yahoo Finance Here's Why McCoy Global (TSE:MCB) Can Manage Its Debt Responsibly
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. Importantly, McCoy Global Inc. (TSE:MCB) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for McCoy Global
How Much Debt Does McCoy Global Carry?
You can click the graphic below for the historical numbers, but it shows that as of December 2019 McCoy Global had CA$8.19m of debt, an increase on CA$4.78m, over one year. But on the other hand it also has CA$8.38m in cash, leading to a CA$192.0k net cash position.
How Strong Is McCoy Global's Balance Sheet?
According to the last reported balance sheet, McCoy Global had liabilities of CA$13.9m due within 12 months, and liabilities of CA$7.88m due beyond 12 months. On the other hand, it had cash of CA$8.38m and CA$8.79m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$4.61m.
This deficit isn't so bad because McCoy Global is worth CA$11.6m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, McCoy Global also has more cash than debt, so we're pretty confident it can manage its debt safely.
We also note that McCoy Global improved its EBIT from a last year's loss to a positive CA$1.8m. 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 McCoy 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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. McCoy Global 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. Over the last year, McCoy Global actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Summing up
Although McCoy Global's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CA$192.0k. And it impressed us with free cash flow of CA$3.3m, being 185% of its EBIT. So we don't have any problem with McCoy Global's use of debt. 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 3 warning signs for McCoy Global you should be aware of, and 1 of them is concerning.
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.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.
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