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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Muscle Maker, Inc. (NASDAQ:GRIL) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Muscle Maker's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2021 Muscle Maker had US$1.56m of debt, an increase on US$1.32m, over one year. But on the other hand it also has US$4.97m in cash, leading to a US$3.41m net cash position.
How Healthy Is Muscle Maker's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Muscle Maker had liabilities of US$3.09m due within 12 months and liabilities of US$2.32m due beyond that. Offsetting these obligations, it had cash of US$4.97m as well as receivables valued at US$287.0k due within 12 months. So it has liabilities totalling US$158.9k more than its cash and near-term receivables, combined.
Having regard to Muscle Maker's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$19.1m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Muscle Maker also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Muscle Maker 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, Muscle Maker reported revenue of US$6.3m, which is a gain of 35%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is Muscle Maker?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Muscle Maker lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$8.4m of cash and made a loss of US$7.9m. With only US$3.41m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, Muscle Maker may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for Muscle Maker (of which 3 shouldn't be ignored!) you should know about.
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.
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.
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