David Iben put it well when he said, ‘Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.’ 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 Magnite, Inc. (NASDAQ:MGNI) does use debt in its business. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

What Is Magnite’s Debt?

As you can see below, at the end of March 2021, Magnite had US$388.6m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds US$468.6m in cash, so it actually has US$79.9m net cash.

A Look At Magnite’s Liabilities

Zooming in on the latest balance sheet data, we can see that Magnite had liabilities of US$449.0m due within 12 months and liabilities of US$423.4m due beyond that. Offsetting these obligations, it had cash of US$468.6m as well as receivables valued at US$401.8m due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that Magnite’s balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it’s hard to imagine that the US$3.90b company is struggling for cash, we still think it’s worth monitoring its balance sheet. While it does have liabilities worth noting, Magnite also has more cash than debt, so we’re pretty confident it can manage its debt safely. 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 Magnite’s ability to maintain a healthy balance sheet going forward.

In the last year Magnite wasn’t profitable at an EBIT level, but managed to grow its revenue by 53%, to US$246m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Magnite?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Magnite had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$29m and booked a US$57m accounting loss. With only US$79.9m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, Magnite may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. There’s no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet.