Yahoo Finance Metal Tiger (LON:MTR) Could Easily Take On More Debt
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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Metal Tiger plc (LON:MTR) does carry debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. 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, 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.
See our latest analysis for Metal Tiger
How Much Debt Does Metal Tiger Carry?
The image below, which you can click on for greater detail, shows that at December 2021 Metal Tiger had debt of UK£11.0m, up from UK£7.10m in one year. However, its balance sheet shows it holds UK£32.7m in cash, so it actually has UK£21.7m net cash.
How Healthy Is Metal Tiger's Balance Sheet?
We can see from the most recent balance sheet that Metal Tiger had liabilities of UK£9.04m falling due within a year, and liabilities of UK£4.57m due beyond that. Offsetting this, it had UK£32.7m in cash and UK£207.0k in receivables that were due within 12 months. So it actually has UK£19.3m more liquid assets than total liabilities.
This excess liquidity is a great indication that Metal Tiger's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Metal Tiger has more cash than debt is arguably a good indication that it can manage its debt safely.
On top of that, Metal Tiger grew its EBIT by 47% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Metal Tiger'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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Metal Tiger 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. During the last three years, Metal Tiger burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.
Summing up
While it is always sensible to investigate a company's debt, in this case Metal Tiger has UK£21.7m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 47% over the last year. So is Metal Tiger's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Metal Tiger (1 doesn't sit too well with us) you should be aware of.
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.
