Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Maxar Technologies Inc. (NYSE:MAXR) does carry debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Maxar Technologies's Net Debt?
The chart below, which you can click on for greater detail, shows that Maxar Technologies had US$3.24b in debt in June 2019; about the same as the year before. And it doesn't have much cash, so its net debt is about the same.
A Look At Maxar Technologies's Liabilities
We can see from the most recent balance sheet that Maxar Technologies had liabilities of US$685.0m falling due within a year, and liabilities of US$3.67b due beyond that. On the other hand, it had cash of US$63.0m and US$514.0m worth of receivables due within a year. So it has liabilities totalling US$3.78b more than its cash and near-term receivables, combined.
The deficiency here weighs heavily on the US$394.5m 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 definitely think shareholders need to watch this one closely. After all, Maxar Technologies would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Maxar Technologies'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.
Over 12 months, Maxar Technologies saw its revenue hold pretty steady. While that hardly impresses, its not too bad either.
Importantly, Maxar Technologies had negative earnings before interest and tax (EBIT), over the last year. Its EBIT loss was a whopping US$70m. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it burned through US$26m in the last year. So we consider this a high risk stock, and we're worried its share price could sink faster than than a dingy with a great white shark attacking it. For riskier companies like Maxar Technologies 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.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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