Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Magnis Energy Technologies Limited (ASX:MNS) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Magnis Energy Technologies

What Is Magnis Energy Technologies's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Magnis Energy Technologies had AU$65.2m of debt, an increase on none, over one year. But it also has AU$72.9m in cash to offset that, meaning it has AU$7.72m net cash. debt-equity-history-analysis

How Healthy Is Magnis Energy Technologies' Balance Sheet?

According to the last reported balance sheet, Magnis Energy Technologies had liabilities of AU$3.94m due within 12 months, and liabilities of AU$65.2m due beyond 12 months. Offsetting this, it had AU$72.9m in cash and AU$20.1m in receivables that were due within 12 months. So it can boast AU$23.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Magnis Energy Technologies could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Magnis Energy Technologies boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Magnis Energy Technologies's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.



Since Magnis Energy Technologies has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.

So How Risky Is Magnis Energy Technologies?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Magnis Energy Technologies had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of AU$27m and booked a AU$11m accounting loss. With only AU$7.72m on the balance sheet, it would appear that its going to need to raise capital again soon. Importantly, Magnis Energy Technologies's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted  3 warning signs for Magnis Energy Technologies  (of which 1 shouldn't be ignored!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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