Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ 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, Minerals Technologies Inc. (NYSE:MTX) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company’s use of debt, we first look at cash and debt together.
What Is Minerals Technologies’s Net Debt?
As you can see below, Minerals Technologies had US$1.04b of debt, at October 2021, which is about the same as the year before. You can click the chart for greater detail. However, it also had US$311.3m in cash, and so its net debt is US$725.3m.
NYSE:MTX Debt to Equity History November 8th 2021
A Look At Minerals Technologies’ Liabilities
According to the last reported balance sheet, Minerals Technologies had liabilities of US$423.3m due within 12 months, and liabilities of US$1.42b due beyond 12 months. Offsetting these obligations, it had cash of US$311.3m as well as receivables valued at US$383.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.14b.
While this might seem like a lot, it is not so bad since Minerals Technologies has a market capitalization of US$2.56b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.
Minerals Technologies’s net debt is sitting at a very reasonable 2.2 times its EBITDA, while its EBIT covered its interest expense just 6.3 times last year. While that doesn’t worry us too much, it does suggest the interest payments are somewhat of a burden. If Minerals Technologies can keep growing EBIT at last year’s rate of 19% over the last year, then it will find its debt load easier to manage. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Minerals Technologies 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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don’t cut it. So we always check how much of that EBIT is translated into free cash flow. During the last three years, Minerals Technologies produced sturdy free cash flow equating to 72% of its EBIT, about what we’d expect. This cold hard cash means it can reduce its debt when it wants to.
Minerals Technologies’s conversion of EBIT to free cash flow suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14’s goalkeeper. But truth be told we feel its level of total liabilities does undermine this impression a bit. All these things considered, it appears that Minerals Technologies can comfortably handle its current debt levels. On the plus side, this leverage can boost shareholder returns, but the potential downside is more risk of loss, so it’s worth monitoring the balance sheet. 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. Case in point: We’ve spotted 1 warning sign for Minerals Technologies you should be aware of.
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.
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.
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