Does Mirbud (WSE:MRB) have a healthy balance sheet?
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” 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. We notice that Mirbud S.A. (WSE:MRB) has debt on its balance sheet. But does this debt worry shareholders?
Why is debt risky?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. When we look at debt levels, we first consider cash and debt levels, together.
See our latest analysis for Mirbud
What is Mirbud’s net debt?
You can click on the graph below for historical figures, but it shows that in September 2021, Mirbud had 350.9 million zł in debt, an increase of 232.7 million zł, year on year. On the other hand, it has 285.5 million zł of liquid assets, which leads to a net debt of approximately 65.4 million zł.
A Look at Mirbud’s Responsibilities
We can see from the most recent balance sheet that Mirbud had liabilities of 703.2 million zł due in one year, and liabilities of 671.0 million zł due beyond. As compensation for these obligations, it had cash of 285.5 million zł as well as receivables valued at 558.2 million zł payable within 12 months. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables of 530.5 million zł.
Since this deficit is actually larger than the company’s market capitalization of zł420.2 million, we think shareholders really should be watching Mirbud’s debt levels, like a parent watching their child ride a bike. for the first time. In theory, extremely large dilution would be required if the company were forced to repay its debts by raising capital at the current share price.
In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). Thus, we consider debt to earnings with and without depreciation and amortization charges.
Mirbud has a low debt to EBITDA ratio of just 0.39. But what’s really cool is that he actually managed to receive more interest than he paid in the last year. So there’s no doubt that this company can go into debt and still be cool as a cucumber. Even better, Mirbud increased its EBIT by 243% last year, which is an impressive improvement. If sustained, this growth will make debt even more manageable in years to come. When analyzing debt levels, the balance sheet is the obvious starting point. But it is Mirbud’s earnings that will influence the balance sheet in the future. So, if you want to know more about its earnings, it might be worth checking out this graph of its long-term trend.
Finally, a business needs free cash flow to pay off its debts; book profits are not enough. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Fortunately for all shareholders, Mirbud has actually produced more free cash flow than EBIT over the past three years. This kind of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Our point of view
The good news is that Mirbud’s demonstrated ability to cover its interest costs with its EBIT delights us like a fluffy puppy does a toddler. But we have to admit that we find that his level of total liabilities has the opposite effect. Looking at all of the aforementioned factors together, it seems to us that Mirbud can manage its debt quite comfortably. Of course, while this leverage can improve return on equity, it comes with more risk, so it’s worth keeping an eye out for. Above most other metrics, we think it’s important to track how quickly earnings per share are growing, if at all. If you’ve also achieved this achievement, you’re in luck, because today you can view this interactive chart of Mirbud’s earnings per share history for free.
Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.