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, MNF Group Limited (ASX:MNF) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for MNF Group

What Is MNF Group's Debt?

As you can see below, MNF Group had AU$30.6m of debt at December 2019, down from AU$54.5m a year prior. But on the other hand it also has AU$38.6m in cash, leading to a AU$7.97m net cash position.

How Strong Is MNF Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that MNF Group had liabilities of AU$33.6m due within 12 months and liabilities of AU$55.8m due beyond that. Offsetting these obligations, it had cash of AU$38.6m as well as receivables valued at AU$39.8m due within 12 months. So its liabilities total AU$11.1m more than the combination of its cash and short-term receivables.

Of course, MNF Group has a market capitalization of AU$389.5m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, MNF Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also positive, MNF Group grew its EBIT by 29% in the last year, and that should make it easier to pay down debt, going forward. 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 MNF Group'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While MNF Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, MNF Group burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

We could understand if investors are concerned about MNF Group's liabilities, but we can be reassured by the fact it has has net cash of AU$7.97m. And we liked the look of last year's 29% year-on-year EBIT growth. So we are not troubled with MNF Group's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for MNF Group you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

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