The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, MSL Solutions Limited (ASX:MPW) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for MSL Solutions

How Much Debt Does MSL Solutions Carry?

As you can see below, at the end of December 2018, MSL Solutions had AU$1.35m of debt, up from AU$54.0k a year ago. Click the image for more detail. However, its balance sheet shows it holds AU$1.50m in cash, so it actually has AU$151.0k net cash.

How Strong Is MSL Solutions's Balance Sheet?

According to the last reported balance sheet, MSL Solutions had liabilities of AU$13.3m due within 12 months, and liabilities of AU$1.93m due beyond 12 months. Offsetting this, it had AU$1.50m in cash and AU$6.46m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$7.29m.

While this might seem like a lot, it is not so bad since MSL Solutions has a market capitalization of AU$20.0m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, MSL Solutions boasts net cash, so it's fair to say it does not have a heavy 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 MSL Solutions's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.