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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Mission Ready Solutions Inc. (CVE:MRS) does carry debt. But is this debt a concern to shareholders?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
What Is Mission Ready Solutions's Debt?
As you can see below, Mission Ready Solutions had CA$3.11m of debt at June 2021, down from CA$9.74m a year prior. However, it does have CA$4.44m in cash offsetting this, leading to net cash of CA$1.33m.
How Healthy Is Mission Ready Solutions' Balance Sheet?
We can see from the most recent balance sheet that Mission Ready Solutions had liabilities of CA$14.5m falling due within a year, and liabilities of CA$2.04m due beyond that. Offsetting this, it had CA$4.44m in cash and CA$1.09m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$11.0m.
This deficit isn't so bad because Mission Ready Solutions is worth CA$45.6m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Mission Ready Solutions also has more cash than debt, so we're pretty confident it can manage its debt safely.
We also note that Mission Ready Solutions improved its EBIT from a last year's loss to a positive CA$2.7m. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Mission Ready Solutions'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. Mission Ready Solutions 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. Happily for any shareholders, Mission Ready Solutions actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Although Mission Ready Solutions'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$1.33m. The cherry on top was that in converted 250% of that EBIT to free cash flow, bringing in CA$6.7m. So we don't have any problem with Mission Ready Solutions'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. To that end, you should be aware of the 4 warning signs we've spotted with Mission Ready Solutions .
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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