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. When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. 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.
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Materialise Carry?
The chart below, which you can click on for greater detail, shows that Materialise had €100.9m in debt in June 2019; about the same as the year before. However, it does have €108.9m in cash offsetting this, leading to net cash of €7.98m.
A Look At Materialise's Liabilities
We can see from the most recent balance sheet that Materialise had liabilities of €77.7m falling due within a year, and liabilities of €104.0m due beyond that. Offsetting these obligations, it had cash of €108.9m as well as receivables valued at €40.1m due within 12 months. So its liabilities total €32.8m more than the combination of its cash and short-term receivables.
Given Materialise has a market capitalization of €847.1m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Materialise boasts net cash, so it's fair to say it does not have a heavy debt load!
We saw Materialise grow its EBIT by 5.4% in the last twelve months. That's far from incredible but it is a good thing, when it comes to paying off debt. There's no doubt that we learn most about debt from the balance sheet. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. During the last three years, Materialise burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
While it is always sensible to look at a company's total liabilities, it is very reassuring that Materialise has €7.98m in net cash. And it also grew its EBIT by 5.4% over the last year. So although we see some areas for improvement, we're not too worried about Materialise's balance sheet. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Materialise's earnings per share history for free.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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