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.' 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. As with many other companies MYT Netherlands Parent B.V. (NYSE:MYTE) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

What Is MYT Netherlands Parent B.V's Debt?

As you can see below, at the end of December 2023, MYT Netherlands Parent B.V had €1.40m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds €6.44m in cash, so it actually has €5.03m net cash.

How Healthy Is MYT Netherlands Parent B.V's Balance Sheet?

The latest balance sheet data shows that MYT Netherlands Parent B.V had liabilities of €230.9m due within a year, and liabilities of €47.8m falling due after that. Offsetting these obligations, it had cash of €6.44m as well as receivables valued at €16.6m due within 12 months. So it has liabilities totalling €255.7m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of €267.8m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, MYT Netherlands Parent B.V 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 MYT Netherlands Parent B.V's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, MYT Netherlands Parent B.V reported revenue of €787m, which is a gain of 11%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is MYT Netherlands Parent B.V?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year MYT Netherlands Parent B.V had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of €38m and booked a €28m accounting loss. With only €5.03m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. For instance, we've identified 2 warning signs for MYT Netherlands Parent B.V (1 is concerning) you should be aware of.

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.

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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.