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. As with many other companies Mama's Creations, Inc. (NASDAQ:MAMA) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

How Much Debt Does Mama's Creations Carry?

As you can see below, Mama's Creations had US$6.41m of debt, at October 2025, 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$18.1m in cash, leading to a US$11.7m net cash position.

How Healthy Is Mama's Creations' Balance Sheet?

According to the last reported balance sheet, Mama's Creations had liabilities of US$22.1m due within 12 months, and liabilities of US$12.3m due beyond 12 months. Offsetting this, it had US$18.1m in cash and US$11.0m in receivables that were due within 12 months. So its liabilities total US$5.32m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Mama's Creations' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$527.3m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Mama's Creations also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also positive, Mama's Creations grew its EBIT by 24% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Mama's Creations'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Mama's Creations 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. During the last three years, Mama's Creations generated free cash flow amounting to a very robust 92% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

We could understand if investors are concerned about Mama's Creations's liabilities, but we can be reassured by the fact it has has net cash of US$11.7m. The cherry on top was that in converted 92% of that EBIT to free cash flow, bringing in US$6.0m. So we don't think Mama's Creations's use of debt is risky. Another factor that would give us confidence in Mama's Creations 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.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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.