Warren Buffett famously said, '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. We note that MoxieTech Group AB (publ) (STO:MOXI) does have debt on its balance sheet. But is this debt a concern to shareholders?
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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 MoxieTech Group's Net Debt?
The image below, which you can click on for greater detail, shows that at April 2019 MoxieTech Group had debt of kr22.2m, up from kr21.1m in one year. However, because it has a cash reserve of kr3.61m, its net debt is less, at about kr18.6m.
How Strong Is MoxieTech Group's Balance Sheet?
We can see from the most recent balance sheet that MoxieTech Group had liabilities of kr75.1m falling due within a year, and liabilities of kr3.15m due beyond that. Offsetting these obligations, it had cash of kr3.61m as well as receivables valued at kr42.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr32.6m.
When you consider that this deficiency exceeds the company's kr32.0m market capitalization, you might well be inclined to review the balance sheet, just like one might study a new partner's social media. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is MoxieTech Group'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.
In the last year MoxieTech Group's revenue was pretty flat. While that hardly impresses, its not too bad either.
Over the last twelve months MoxieTech Group produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable kr12m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of-kr12.1m. In the meantime, we consider the stock to be risky. For riskier companies like MoxieTech Group I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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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