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. We can see that Mint Payments Limited (ASX:MNW) does use debt in its business. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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.
What Is Mint Payments's Debt?
As you can see below, at the end of December 2018, Mint Payments had AU$7.50m of debt, up from AU$6.00m a year ago. Click the image for more detail. However, because it has a cash reserve of AU$2.09m, its net debt is less, at about AU$5.41m.
A Look At Mint Payments's Liabilities
The latest balance sheet data shows that Mint Payments had liabilities of AU$1.72m due within a year, and liabilities of AU$7.56m falling due after that. On the other hand, it had cash of AU$2.09m and AU$1.66m worth of receivables due within a year. So it has liabilities totalling AU$5.54m more than its cash and near-term receivables, combined.
Mint Payments has a market capitalization of AU$18.1m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Mint Payments will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Mint Payments saw its revenue drop to AU$3.5m, which is a fall of 35%. To be frank that doesn't bode well.
While Mint Payments's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable AU$4.4m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled AU$5.1m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Mint Payments's profit, revenue, and operating cashflow have changed over the last few years.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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