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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Major Drilling Group International Inc. (TSE:MDI) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
What Is Major Drilling Group International's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Major Drilling Group International had CA$17.4m of debt in April 2019, down from CA$19.3m, one year before. However, it does have CA$27.4m in cash offsetting this, leading to net cash of CA$10.0m.
How Strong Is Major Drilling Group International's Balance Sheet?
According to the last reported balance sheet, Major Drilling Group International had liabilities of CA$65.6m due within 12 months, and liabilities of CA$32.7m due beyond 12 months. On the other hand, it had cash of CA$27.4m and CA$92.5m worth of receivables due within a year. So it can boast CA$21.6m more liquid assets than total liabilities.
This surplus suggests that Major Drilling Group International has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Major Drilling Group International boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Major Drilling Group International can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Major Drilling Group International reported revenue of CA$385m, which is a gain of 12%. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is Major Drilling Group International?
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 Major Drilling Group International lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CA$4.5m of cash and made a loss of CA$18m. But the saving grace is the CA$27m on the balance sheet. That kitty means the company can keep spending for growth for at least five years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. For riskier companies like Major Drilling Group International I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
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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