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.' 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. Importantly, Marcus & Millichap, Inc. (NYSE:MMI) does carry debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Marcus & Millichap Carry?
As you can see below, Marcus & Millichap had US$7.65m of debt at March 2019, down from US$8.69m a year prior. However, it does have US$319.2m in cash offsetting this, leading to net cash of US$311.5m.
How Strong Is Marcus & Millichap's Balance Sheet?
The latest balance sheet data shows that Marcus & Millichap had liabilities of US$73.4m due within a year, and liabilities of US$104.1m falling due after that. Offsetting this, it had US$319.2m in cash and US$8.61m in receivables that were due within 12 months. So it actually has US$150.4m more liquid assets than total liabilities.
This surplus suggests that Marcus & Millichap has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Marcus & Millichap boasts net cash, so it's fair to say it does not have a heavy debt load!
The good news is that Marcus & Millichap has increased its EBIT by 6.8% over twelve months, which should ease any concerns about debt repayment. 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 Marcus & Millichap 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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Marcus & Millichap 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. Over the most recent three years, Marcus & Millichap recorded free cash flow worth 70% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
While it is always sensible to investigate a company's debt, in this case Marcus & Millichap has US$312m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 70% of that EBIT to free cash flow, bringing in US$83m. So we don't think Marcus & Millichap's use of debt is risky. We'd be very excited to see if Marcus & Millichap insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.
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.
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