Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that MCH Group AG (VTX:MCHN) does have debt on its balance sheet. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is MCH Group's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2018 MCH Group had CHF278.2m of debt, an increase on CHF246.5m, over one year. On the flip side, it has CHF129.5m in cash leading to net debt of about CHF148.7m.
How Strong Is MCH Group's Balance Sheet?
The latest balance sheet data shows that MCH Group had liabilities of CHF152.9m due within a year, and liabilities of CHF288.5m falling due after that. Offsetting these obligations, it had cash of CHF129.5m as well as receivables valued at CHF84.9m due within 12 months. So it has liabilities totalling CHF227.0m more than its cash and near-term receivables, combined.
The deficiency here weighs heavily on the CHF136.9m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt After all, MCH Group would likely require a major re-capitalisation if it had to pay its creditors today. 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 MCH Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year MCH Group managed to grow its revenue by 6.2%, to CHF516m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Over the last twelve months MCH Group produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable CHF16m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through CHF25m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how MCH Group's profit, revenue, and operating cashflow have changed over the last few years.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Thank you for reading.