Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We can see that MaxCyte, Inc. (LON:MXCT) does use debt in its business. But the real question is whether this debt is making the company risky.
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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
What Is MaxCyte's Net Debt?
As you can see below, MaxCyte had US$4.92m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. But it also has US$34.8m in cash to offset that, meaning it has US$29.8m net cash.
A Look At MaxCyte's Liabilities
We can see from the most recent balance sheet that MaxCyte had liabilities of US$11.6m falling due within a year, and liabilities of US$6.94m due beyond that. On the other hand, it had cash of US$34.8m and US$5.17m worth of receivables due within a year. So it actually has US$21.4m more liquid assets than total liabilities.
This short term liquidity is a sign that MaxCyte could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, MaxCyte 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 future earnings, more than anything, that will determine MaxCyte'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.
Over 12 months, MaxCyte reported revenue of US$26m, which is a gain of 21%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is MaxCyte?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year MaxCyte had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$11m of cash and made a loss of US$12m. But at least it has US$29.8m on the balance sheet to spend on growth, near-term. MaxCyte's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for MaxCyte that you should be aware of before investing here.
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.
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. 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.