Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that ‘Volatility is far from synonymous with risk.’ 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 Materialise NV (NASDAQ:MTLS) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Materialise Carry?
The image below, which you can click on for greater detail, shows that Materialise had debt of €97.5m at the end of June 2021, a reduction from €111.9m over a year. But on the other hand it also has €182.8m in cash, leading to a €85.3m net cash position.
NasdaqGS:MTLS Debt to Equity History October 28th 2021
A Look At Materialise’s Liabilities
Zooming in on the latest balance sheet data, we can see that Materialise had liabilities of €89.3m due within 12 months and liabilities of €100.0m due beyond that. Offsetting this, it had €182.8m in cash and €33.7m in receivables that were due within 12 months. So it can boast €27.2m more liquid assets than total liabilities.
This short term liquidity is a sign that Materialise could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Materialise boasts net cash, so it’s fair to say it does not have a heavy debt load!
Importantly, Materialise grew its EBIT by 77% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Materialise’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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Materialise 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. Happily for any shareholders, Materialise actually produced more free cash flow than EBIT over the last three years. There’s nothing better than incoming cash when it comes to staying in your lenders’ good graces.
While it is always sensible to investigate a company’s debt, in this case Materialise has €85.3m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 336% of that EBIT to free cash flow, bringing in €14m. So we don’t think Materialise’s use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we’ve spotted with Materialise .
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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