Does Mangalam Global Enterprise (NSE: MGEL) have a healthy balance sheet?
Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried “. 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 notice that Mangalam Global Enterprise Limited (NSE: MGEL) has debt on its balance sheet. But should shareholders be worried about its use of debt?
What risk does debt entail?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. When we think of a business’s use of debt, we first look at cash flow and debt together.
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What is the debt of Mangalam Global Enterprise?
You can click on the graph below for the historical figures, but it shows that in March 2021, Mangalam Global Enterprise had a debt of 1.17 billion yen, an increase from 539.3 million yen, over a year. However, it has 368.0M in cash offsetting this, leading to net debt of around 804.2M.
A look at the responsibilities of Mangalam Global Enterprise
We can see from the most recent balance sheet that Mangalam Global Enterprise had liabilities of 1.37 billion yen due within one year and liabilities of 144.2 million yen due beyond. In return, he had 368.0 million in cash and 982.9 million in receivables due within 12 months. Its liabilities therefore exceed the sum of its cash and its (short-term) receivables by â¹ 165.5 million.
Given that Mangalam Global Enterprise has a market capitalization of 1.41 billion yen, it is hard to believe that these liabilities pose a significant threat. Having said that, it is clear that we must continue to monitor his record lest it get worse.
We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). Thus, we look at debt over earnings with and without amortization charges.
The low interest coverage of 1.1 times and an unusually high Net Debt / EBITDA ratio of 7.5 affected our confidence in Mangalam Global Enterprise like a punch in the gut. This means that we would consider him to be in heavy debt. Investors should also be troubled that Mangalam Global Enterprise has seen its EBIT fall by 12% over the past twelve months. If things continue like this, managing debt will be about as easy as putting an angry house cat in its travel box. When analyzing debt levels, the balance sheet is the obvious starting point. But it is the earnings of Mangalam Global Enterprise that will influence the balance sheet in the future. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. We must therefore clearly check whether this EBIT generates a corresponding free cash flow. Over the past three years, Mangalam Global Enterprise has spent a lot of money. While investors no doubt expect this situation to reverse in due course, it clearly means that its use of debt is riskier.
Our point of view
To be frank, Mangalam Global Enterprise’s interest coverage and track record of converting EBIT to free cash flow makes us rather uncomfortable with its debt levels. But at least he’s pretty decent to stay on top of his total liabilities; it’s encouraging. Overall, it seems to us that Mangalam Global Enterprise’s balance sheet is really very risky for the company. For this reason, we are quite cautious on the stock, and we believe that shareholders should keep a close eye on its liquidity. 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. Note that Mangalam Global Enterprise displays 5 warning signs in our investment analysis , and 2 of them make us uncomfortable …
At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
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