Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. Like many other companies Mission Ready Solutions Inc. (CVE:MRS) uses debt. But does this debt worry shareholders?
What risk does debt carry?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. If things go really bad, lenders can take over the business. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. The first step when considering a company’s debt levels is to consider its cash and debt together.
Check out our latest analysis for Mission Ready Solutions
How much debt does Mission Ready Solutions have?
As you can see below, at the end of December 2021, Mission Ready Solutions had a debt of 18.2 million CAD, compared to 4.87 million CAD a year ago. Click on the image for more details. On the other hand, it has C$7.90 million in cash, resulting in a net debt of approximately C$10.3 million.
A look at the responsibilities of Mission Ready Solutions
The latest balance sheet data shows that Mission Ready Solutions had liabilities of C$4.80 million due within one year, and liabilities of C$15.1 million falling due thereafter. In compensation for these obligations, it had cash of 7.90 million Canadian dollars as well as receivables valued at 2.72 million Canadian dollars maturing within 12 months. Thus, its liabilities outweigh the sum of its cash and (current) receivables of C$9.32 million.
Mission Ready Solutions has a market capitalization of C$44.7 million, so it could very likely raise funds to improve its balance sheet, should the need arise. But we definitely want to keep our eyes peeled for indications that its debt is too risky. There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in total isolation; since Mission Ready Solutions will need revenue to repay this debt. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.
Last year, Mission Ready Solutions recorded a loss before interest and taxes and actually reduced its revenue by 12%, to C$92 million. It’s not what we expected to see.
Not only has Mission Ready Solutions’ revenue dropped over the past twelve months, it has also produced negative earnings before interest and taxes (EBIT). To be precise, the EBIT loss amounted to C$1.0 million. When we look at this and recall the liabilities on its balance sheet, versus cash, it seems unwise to us that the company has liabilities. Quite frankly, we think the track record falls short, although it could improve over time. However, it doesn’t help that he’s burned through C$1.2 million in cash in the past year. So, to be frank, we think it’s risky. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. Be aware that Mission Ready Solutions displays 3 warning signs in our investment analysis you should know…
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.
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