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Mesa Laboratories (NASDAQ:MLAB) Has A Pretty Healthy Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that Mesa Laboratories, Inc. (NASDAQ:MLAB) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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.

Check out our latest analysis for Mesa Laboratories

What Is Mesa Laboratories's Net Debt?

As you can see below, Mesa Laboratories had US$145.7m of debt, at March 2021, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$263.9m in cash, leading to a US$118.2m net cash position.

debt-equity-history-analysis
debt-equity-history-analysis

How Healthy Is Mesa Laboratories' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Mesa Laboratories had liabilities of US$32.6m due within 12 months and liabilities of US$162.7m due beyond that. On the other hand, it had cash of US$263.9m and US$23.8m worth of receivables due within a year. So it actually has US$92.4m more liquid assets than total liabilities.

This surplus suggests that Mesa Laboratories has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Mesa Laboratories has more cash than debt is arguably a good indication that it can manage its debt safely.

Shareholders should be aware that Mesa Laboratories's EBIT was down 31% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Mesa Laboratories can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Mesa Laboratories may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Mesa Laboratories actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Mesa Laboratories has net cash of US$118.2m, as well as more liquid assets than liabilities. The cherry on top was that in converted 185% of that EBIT to free cash flow, bringing in US$35m. So we are not troubled with Mesa Laboratories's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Mesa Laboratories has 1 warning sign we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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.

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