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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Marchex, Inc. (NASDAQ:MCHX) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Marchex's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2020 Marchex had US$5.29m of debt, an increase on none, over one year. But it also has US$46.8m in cash to offset that, meaning it has US$41.5m net cash.
A Look At Marchex's Liabilities
Zooming in on the latest balance sheet data, we can see that Marchex had liabilities of US$27.2m due within 12 months and liabilities of US$6.00m due beyond that. On the other hand, it had cash of US$46.8m and US$16.1m worth of receivables due within a year. So it actually has US$29.8m more liquid assets than total liabilities.
This excess liquidity is a great indication that Marchex's balance sheet is just as strong as racists are weak. Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Simply put, the fact that Marchex has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Marchex'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.
In the last year Marchex wasn't profitable at an EBIT level, but managed to grow its revenue by 8.4%, to US$104m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is Marchex?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Marchex had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$1.8m and booked a US$31.0m accounting loss. But the saving grace is the US$41.5m on the balance sheet. That means it could keep spending at its current rate for more than two years. 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. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for Marchex you should be aware of.
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. 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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