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. 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. As with many other companies Maui Land & Pineapple Company, Inc. (NYSE:MLP) makes use of debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Maui Land & Pineapple Company's Net Debt?
The image below, which you can click on for greater detail, shows that at June 2019 Maui Land & Pineapple Company had debt of US$2.04m, up from US$1.24m in one year. However, it does have US$622.0k in cash offsetting this, leading to net debt of about US$1.41m.
How Strong Is Maui Land & Pineapple Company's Balance Sheet?
We can see from the most recent balance sheet that Maui Land & Pineapple Company had liabilities of US$4.03m falling due within a year, and liabilities of US$12.6m due beyond that. On the other hand, it had cash of US$622.0k and US$3.56m worth of receivables due within a year. So its liabilities total US$12.4m more than the combination of its cash and short-term receivables.
Given Maui Land & Pineapple Company has a market capitalization of US$201.4m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. But either way, Maui Land & Pineapple Company has virtually no net debt, 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 it is Maui Land & Pineapple Company'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.
Over 12 months, Maui Land & Pineapple Company reported revenue of US$11m, which is a gain of 3.8%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.
Importantly, Maui Land & Pineapple Company had negative earnings before interest and tax (EBIT), over the last year. Indeed, it lost US$4.1m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$370k in negative free cash flow over the last twelve months. So to be blunt we think it is risky. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Maui Land & Pineapple Company insider transactions.
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.
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