Despite the lack of profits, Magnis Energy Technologies (ASX: MNS) appears to be on top of its debt

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Warren Buffett said: “Volatility is far from synonymous with risk”. So it can be obvious that you need to consider debt, when you think about how risky a given stock is, because too much debt can sink a business. We note that Magnis Energy Technologies Limited (ASX: MNS) has debt on its balance sheet. But the real question is whether this debt makes the business risky.

What risk does debt entail?

Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. Of course, many companies use debt to finance their growth without negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.

Check out our latest review for Magnis Energy Technologies

What is Magnis Energy Technologies’ 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 on the other hand, it also has A $ 72.9 million in cash, which leads to a net cash position of A $ 7.72 million.

ASX: MNS Debt to equity history October 19, 2021

A look at the responsibilities of Magnis Energy Technologies

Zooming in on the latest balance sheet data, we can see that Magnis Energy Technologies had A $ 3.94 million liability due within 12 months and A $ 65.2 million liability beyond. In compensation for these obligations, it had cash of A $ 72.9 million as well as receivables valued at A $ 20.1 million maturing within 12 months. So he actually has AU $ 23.8 million Following liquid assets as 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! When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in isolation; since Magnis Energy Technologies will need income to repay this debt. So if you want to know more about its profits, it may be worth checking out this chart of its long term profit trend.

Given that Magnis Energy Technologies does not have 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?

We are convinced that loss-making companies are, in general, riskier than profitable ones. 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 in net cash, the company may need to raise more capital if it doesn’t break even soon. The good news for shareholders is that Magnis Energy Technologies is experiencing tremendous revenue growth, so there is a very good chance that it will be able to increase its free cash flow in the years to come. High growth nonprofits can be risky, but they can also offer great rewards. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. For example, we have identified 3 warning signs for Magnis Energy Technologies (1 is significant) you must be aware.

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 any of the stocks mentioned.

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