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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Monadelphous Group Limited (ASX:MND) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.
Check out our latest analysis for Monadelphous Group
How Much Debt Does Monadelphous Group Carry?
The image below, which you can click on for greater detail, shows that at December 2021 Monadelphous Group had debt of AU$6.14m, up from AU$1.50m in one year. But on the other hand it also has AU$175.3m in cash, leading to a AU$169.1m net cash position.
A Look At Monadelphous Group's Liabilities
Zooming in on the latest balance sheet data, we can see that Monadelphous Group had liabilities of AU$295.8m due within 12 months and liabilities of AU$88.7m due beyond that. On the other hand, it had cash of AU$175.3m and AU$384.5m worth of receivables due within a year. So it actually has AU$175.3m more liquid assets than total liabilities.
This excess liquidity suggests that Monadelphous Group is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Monadelphous Group has more cash than debt is arguably a good indication that it can manage its debt safely.
In addition to that, we're happy to report that Monadelphous Group has boosted its EBIT by 62%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Monadelphous Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.