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. Importantly, Montrose Environmental Group, Inc. (NYSE:MEG) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Montrose Environmental Group Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Montrose Environmental Group had debt of US$249.8m, up from US$166.7m in one year. However, it also had US$14.5m in cash, and so its net debt is US$235.3m.

A Look At Montrose Environmental Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Montrose Environmental Group had liabilities of US$128.2m due within 12 months and liabilities of US$336.5m due beyond that. Offsetting this, it had US$14.5m in cash and US$218.4m in receivables that were due within 12 months. So it has liabilities totalling US$231.9m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Montrose Environmental Group has a market capitalization of US$660.3m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Montrose Environmental Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Montrose Environmental Group wasn't profitable at an EBIT level, but managed to grow its revenue by 13%, to US$673m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Montrose Environmental Group had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$14m 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$22m of cash over the last year. So to be blunt we think it is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Montrose Environmental Group has 4 warning signs we think you should be aware of.

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.

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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.