Does Magnis Energy Technologies (ASX: MNS) have a healthy balance sheet?

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Legendary fund manager Li Lu (who Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Like many other companies Magnis Energy Technologies Limited (ASX: MNS) uses debt. But the most important question is: what risk does this debt create?

What risk does debt entail?

Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, debt can be an important tool in businesses, especially capital intensive businesses. The first step in examining a company’s debt levels is to consider its cash flow and debt together.

Check out our latest review for Magnis Energy Technologies

What is Magnis Energy Technologies’ net debt?

You can click on the graph below for historical figures, but it shows that as of June 2021 Magnis Energy Technologies had A $ 65.2 million in debt, an increase from none, year over year. But he also has A $ 72.9 million in cash to make up for that, which means he has a net cash of A $ 7.72 million.

debt-equity-historical-analysis

How healthy is Magnis Energy Technologies’ balance sheet?

According to the latest published balance sheet, Magnis Energy Technologies had a liability of AU $ 3.94 million due within 12 months and a liability of AU $ 65.2 million due beyond 12 months. In return, he had A $ 72.9 million in cash and A $ 20.1 million in receivables due within 12 months. He can therefore claim AU $ 23.8 million more liquid assets than total Liabilities.

This short-term liquidity is a sign that Magnis Energy Technologies could probably pay off its debt easily, as its balance sheet is far from tight. In short, Magnis Energy Technologies has a net cash flow, so it’s fair to say that it doesn’t have a lot of debt! The balance sheet is clearly the area you need to focus on when analyzing debt. But it is the results of Magnis Energy Technologies that will influence the balance sheet in the future. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.

Given that Magnis Energy Technologies has no significant operating income, shareholders are likely to hope that it will develop a new mine of value before too long.

So how risky is Magnis Energy Technologies?

Statistically speaking, businesses that lose money are riskier than those that earn it. And over the past year, Magnis Energy Technologies has recorded a loss of earnings before interest and taxes (EBIT), frankly. And during the same period, it recorded a negative AUS $ 27 million free cash outflow and a book loss of A $ 11 million. With only A $ 7.72 million on the balance sheet, it looks like it will soon have to raise capital again. It is important to note that Magnis Energy Technologies’ revenue growth is coming. High growth nonprofits can be risky, but they can also offer great rewards. The balance sheet is clearly the area you need to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. These risks can be difficult to spot. Every business has them, and we’ve spotted 3 warning signs for Magnis Energy Technologies (1 of which should not be ignored!) that you should know.

Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.

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