Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about. 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. Importantly, MAXIMUS, Inc. (NYSE:MMS) does carry debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for MAXIMUS
What Is MAXIMUS's Net Debt?
As you can see below, at the end of September 2019, MAXIMUS had US$9.66m of debt, up from US$0.1 a year ago. Click the image for more detail. However, it does have US$105.6m in cash offsetting this, leading to net cash of US$95.9m.
A Look At MAXIMUS's Liabilities
According to the last reported balance sheet, MAXIMUS had liabilities of US$364.2m due within 12 months, and liabilities of US$133.3m due beyond 12 months. On the other hand, it had cash of US$105.6m and US$621.4m worth of receivables due within a year. So it actually has US$229.4m more liquid assets than total liabilities.
This surplus suggests that MAXIMUS has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that MAXIMUS has more cash than debt is arguably a good indication that it can manage its debt safely.
The good news is that MAXIMUS has increased its EBIT by 6.7% over twelve months, which should ease any concerns about debt repayment. 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 MAXIMUS'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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. MAXIMUS 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. Over the last three years, MAXIMUS recorded free cash flow worth a fulsome 95% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.
Summing up
While it is always sensible to investigate a company's debt, in this case MAXIMUS has US$95.9m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$290m, being 95% of its EBIT. So we don't think MAXIMUS's use of debt is risky. Another factor that would give us confidence in MAXIMUS would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.
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.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.
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Is MAXIMUS (NYSE:MMS) Using Too Much Debt? - Yahoo Finance
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