January 18, 2022

Remarkable Mate

Remarkable business & finance

MACA (ASX:MLD) Has A Somewhat Strained Balance Sheet

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 MACA Limited (ASX:MLD) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses 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.

See our latest analysis for MACA

What Is MACA’s Net Debt?

As you can see below, at the end of June 2021, MACA had AU$117.0m of debt, up from none a year ago. Click the image for more detail. However, it does have AU$127.9m in cash offsetting this, leading to net cash of AU$10.9m.

debt-equity-history-analysis

How Healthy Is MACA’s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that MACA had liabilities of AU$414.9m due within 12 months and liabilities of AU$206.3m due beyond that. Offsetting this, it had AU$127.9m in cash and AU$284.7m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$208.7m.

This deficit is considerable relative to its market capitalization of AU$266.5m, so it does suggest shareholders should keep an eye on MACA’s use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, MACA also has more cash than debt, so we’re pretty confident it can manage its debt safely.

But the other side of the story is that MACA saw its EBIT decline by 8.6% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There’s no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine MACA’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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don’t cut it. MACA may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, MACA recorded free cash flow of 33% of its EBIT, which is weaker than we’d expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

Although MACA’s balance sheet isn’t particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of AU$10.9m. So although we see some areas for improvement, we’re not too worried about MACA’s balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet – far from it. For instance, we’ve identified 2 warning signs for MACA that you should be aware of.

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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

https://finance.yahoo.com/news/maca-asx-mld-somewhat-strained-040623111.html