Legendary fund manager Li Lu (who Charlie Munger backed) once said, ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.’ So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Meyer Burger Technology AG (VTX:MBTN) does carry debt. But the real question is whether this debt is making the company risky.
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. 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.
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What Is Meyer Burger Technology’s Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2022 Meyer Burger Technology had CHF232.4m of debt, an increase on CHF55.0k, over one year. However, it also had CHF167.1m in cash, and so its net debt is CHF65.3m.
A Look At Meyer Burger Technology’s Liabilities
We can see from the most recent balance sheet that Meyer Burger Technology had liabilities of CHF77.8m falling due within a year, and liabilities of CHF212.9m due beyond that. Offsetting this, it had CHF167.1m in cash and CHF68.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CHF55.6m.
Since publicly traded Meyer Burger Technology shares are worth a total of CHF1.27b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it’s clear that we should continue to monitor its balance sheet, lest it change for the worse. There’s no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Meyer Burger Technology can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Meyer Burger Technology wasn’t profitable at an EBIT level, but managed to grow its revenue by 37%, to CHF79m. With any luck the company will be able to grow its way to profitability.
Even though Meyer Burger Technology managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at CHF78m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CHF238m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we’ve spotted 2 warning signs for Meyer Burger Technology you should know about.
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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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.