Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Moolec Science SA (NASDAQ:MLEC) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Moolec Science Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Moolec Science had US$14.3m of debt, an increase on US$2.65m, over one year. However, it does have US$5.39m in cash offsetting this, leading to net debt of about US$8.87m.

How Strong Is Moolec Science's Balance Sheet?

We can see from the most recent balance sheet that Moolec Science had liabilities of US$8.15m falling due within a year, and liabilities of US$19.8m due beyond that. On the other hand, it had cash of US$5.39m and US$1.48m worth of receivables due within a year. So its liabilities total US$21.1m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of US$29.2m, so it does suggest shareholders should keep an eye on Moolec Science's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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 Moolec Science's ability to maintain a healthy balance sheet going forward.

In the last year Moolec Science wasn't profitable at an EBIT level, but managed to grow its revenue by 522%, to US$5.6m. That's virtually the hole-in-one of revenue growth!

Caveat Emptor

Despite the top line growth, Moolec Science still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable US$9.0m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled US$9.5m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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.

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. 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.