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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Methode Electronics, Inc. (NYSE:MEI) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Methode Electronics

How Much Debt Does Methode Electronics Carry?

The chart below, which you can click on for greater detail, shows that Methode Electronics had US$345.4m in debt in November 2024; about the same as the year before. However, it does have US$97.0m in cash offsetting this, leading to net debt of about US$248.4m.

How Healthy Is Methode Electronics' Balance Sheet?

The latest balance sheet data shows that Methode Electronics had liabilities of US$222.6m due within a year, and liabilities of US$414.2m falling due after that. On the other hand, it had cash of US$97.0m and US$260.8m worth of receivables due within a year. So its liabilities total US$279.0m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of US$391.2m, so it does suggest shareholders should keep an eye on Methode Electronics' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Methode Electronics can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Methode Electronics made a loss at the EBIT level, and saw its revenue drop to US$1.1b, which is a fall of 6.0%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Methode Electronics produced an earnings before interest and tax (EBIT) loss. Indeed, it lost US$7.1m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$33m of cash over the last year. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Methode Electronics is showing 1 warning sign in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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