Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Metal Tiger plc (LON:MTR) does carry debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Metal Tiger
How Much Debt Does Metal Tiger Carry?
As you can see below, at the end of June 2019, Metal Tiger had UK£55.0k of debt, up from UK£49.0k a year ago. Click the image for more detail. But it also has UK£21.3m in cash to offset that, meaning it has UK£21.2m net cash.
A Look At Metal Tiger's Liabilities
We can see from the most recent balance sheet that Metal Tiger had liabilities of UK£1.44m falling due within a year, and liabilities of UK£126.0k due beyond that. Offsetting this, it had UK£21.3m in cash and UK£343.0k in receivables that were due within 12 months. So it can boast UK£20.1m more liquid assets than total liabilities.
This luscious liquidity implies that Metal Tiger's balance sheet is sturdy like a giant sequoia tree. On this view, it seems its balance sheet is as strong as a black-belt karate master. Succinctly put, Metal Tiger boasts net cash, so it's fair to say it does not have a heavy debt load!
It was also good to see that despite losing money on the EBIT line last year, Metal Tiger turned things around in the last 12 months, delivering and EBIT of UK£5.2m. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Metal Tiger's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Metal Tiger 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. During the last year, Metal Tiger burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.