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.' 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, McCoy Global Inc. (TSE:MCB) does carry debt. But should shareholders be worried about its use of debt?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
What Is McCoy Global's Net Debt?
The image below, which you can click on for greater detail, shows that McCoy Global had debt of CA$4.19m at the end of December 2021, a reduction from CA$7.30m over a year. However, it does have CA$11.1m in cash offsetting this, leading to net cash of CA$6.95m.
How Strong Is McCoy Global's Balance Sheet?
According to the last reported balance sheet, McCoy Global had liabilities of CA$8.39m due within 12 months, and liabilities of CA$6.74m due beyond 12 months. Offsetting these obligations, it had cash of CA$11.1m as well as receivables valued at CA$6.03m due within 12 months. So it can boast CA$2.04m more liquid assets than total liabilities.
This short term liquidity is a sign that McCoy Global could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, McCoy Global boasts net cash, so it's fair to say it does not have a heavy debt load!
Notably, McCoy Global made a loss at the EBIT level, last year, but improved that to positive EBIT of CA$116k in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is McCoy Global'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While McCoy Global has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, McCoy Global saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
While we empathize with investors who find debt concerning, you should keep in mind that McCoy Global has net cash of CA$6.95m, as well as more liquid assets than liabilities. So although we see some areas for improvement, we're not too worried about McCoy Global's balance sheet. 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 can't be ignored.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.