Materialise (NASDAQ:MTLS) Could Easily Take On More Debt
Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We note that Materialise NV (NASDAQ:MTLS) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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, 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.
See our latest analysis for Materialise
What Is Materialise's Debt?
You can click the graphic below for the historical numbers, but it shows that Materialise had €93.5m of debt in September 2021, down from €108.7m, one year before. However, its balance sheet shows it holds €194.9m in cash, so it actually has €101.4m net cash.
How Strong Is Materialise's Balance Sheet?
We can see from the most recent balance sheet that Materialise had liabilities of €92.1m falling due within a year, and liabilities of €94.3m due beyond that. Offsetting these obligations, it had cash of €194.9m as well as receivables valued at €38.5m due within 12 months. So it actually has €47.1m more liquid assets than total liabilities.
This surplus suggests that Materialise has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Materialise boasts net cash, so it's fair to say it does not have a heavy debt load!
Better yet, Materialise grew its EBIT by 13,998% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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 Materialise 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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the last three years, Materialise actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Summing up
While it is always sensible to investigate a company's debt, in this case Materialise has €101.4m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 291% of that EBIT to free cash flow, bringing in €22m. 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. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Materialise .
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.
