Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Mongolia Growth Group Ltd. (CVE:YAK) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. 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. When we think about a company's use of debt, we first look at cash and debt together.
What Is Mongolia Growth Group's Debt?
As you can see below, Mongolia Growth Group had CA$671.6k of debt, at March 2019, which is about the same the year before. You can click the chart for greater detail. But it also has CA$707.5k in cash to offset that, meaning it has CA$35.9k net cash.
A Look At Mongolia Growth Group's Liabilities
Zooming in on the latest balance sheet data, we can see that Mongolia Growth Group had liabilities of CA$1.19m due within 12 months and liabilities of CA$730.6k due beyond that. Offsetting this, it had CA$707.5k in cash and CA$61.7k in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$1.15m.
Of course, Mongolia Growth Group has a market capitalization of CA$9.23m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Mongolia Growth Group also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Mongolia Growth Group will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Over 12 months, Mongolia Growth Group saw its revenue drop to CA$1.4m, which is a fall of 2.9%. We would much prefer see growth.
So How Risky Is Mongolia Growth Group?
Although Mongolia Growth Group had negative earnings before interest and tax (EBIT) over the last twelve months, it made a statutory profit of CA$2.1m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. For riskier companies like Mongolia Growth Group 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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