David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies MGC Pharmaceuticals Limited (ASX:MXC) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does MGC Pharmaceuticals Carry?
You can click the graphic below for the historical numbers, but it shows that as of June 2021 MGC Pharmaceuticals had AU$4.03m of debt, an increase on none, over one year. But on the other hand it also has AU$5.43m in cash, leading to a AU$1.40m net cash position.
How Strong Is MGC Pharmaceuticals' Balance Sheet?
According to the last reported balance sheet, MGC Pharmaceuticals had liabilities of AU$6.13m due within 12 months, and liabilities of AU$4.28m due beyond 12 months. Offsetting these obligations, it had cash of AU$5.43m as well as receivables valued at AU$2.35m due within 12 months. So it has liabilities totalling AU$2.63m more than its cash and near-term receivables, combined.
Having regard to MGC Pharmaceuticals' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the AU$137.0m company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, MGC Pharmaceuticals 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 it is future earnings, more than anything, that will determine MGC Pharmaceuticals's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, MGC Pharmaceuticals reported revenue of AU$3.0m, which is a gain of 43%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is MGC Pharmaceuticals?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months MGC Pharmaceuticals lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of AU$15m and booked a AU$15m accounting loss. With only AU$1.40m on the balance sheet, it would appear that its going to need to raise capital again soon. MGC Pharmaceuticals's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. For example MGC Pharmaceuticals has 7 warning signs (and 2 which are concerning) we think you should know about.
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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