Is Murray Cod Australia (ASX:MCA) A Risky Investment?
David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 note that Murray Cod Australia Limited (ASX:MCA) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Murray Cod Australia
What Is Murray Cod Australia's Debt?
The image below, which you can click on for greater detail, shows that at December 2021 Murray Cod Australia had debt of AU$6.07m, up from AU$19.3k in one year. However, its balance sheet shows it holds AU$29.3m in cash, so it actually has AU$23.3m net cash.
How Healthy Is Murray Cod Australia's Balance Sheet?
The latest balance sheet data shows that Murray Cod Australia had liabilities of AU$3.71m due within a year, and liabilities of AU$10.9m falling due after that. On the other hand, it had cash of AU$29.3m and AU$1.30m worth of receivables due within a year. So it actually has AU$16.0m more liquid assets than total liabilities.
This surplus suggests that Murray Cod Australia has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Murray Cod Australia boasts net cash, 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 future earnings, more than anything, that will determine Murray Cod Australia'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, Murray Cod Australia reported revenue of AU$10m, which is a gain of 63%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Murray Cod Australia?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Murray Cod Australia had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of AU$10m and booked a AU$4.7m accounting loss. But the saving grace is the AU$23.3m on the balance sheet. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, Murray Cod Australia may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Murray Cod Australia .
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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
