- Oops!Something went wrong.Please try again later.
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. As with many other companies Matrix Service Company (NASDAQ:MTRX) makes use of debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Matrix Service Carry?
You can click the graphic below for the historical numbers, but it shows that Matrix Service had US$9.38m of debt in September 2020, down from US$11.4m, one year before. However, it does have US$82.2m in cash offsetting this, leading to net cash of US$72.8m.
How Strong Is Matrix Service's Balance Sheet?
The latest balance sheet data shows that Matrix Service had liabilities of US$170.2m due within a year, and liabilities of US$36.0m falling due after that. Offsetting these obligations, it had cash of US$82.2m as well as receivables valued at US$233.3m due within 12 months. So it can boast US$109.2m more liquid assets than total liabilities.
This luscious liquidity implies that Matrix Service's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Matrix Service boasts net cash, so it's fair to say it does not have a heavy debt load!
Importantly, Matrix Service's EBIT fell a jaw-dropping 90% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Matrix Service 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 company can only pay off debt with cold hard cash, not accounting profits. While Matrix Service has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Matrix Service actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
While it is always sensible to investigate a company's debt, in this case Matrix Service has US$72.8m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 175% of that EBIT to free cash flow, bringing in -US$40m. So we don't think Matrix Service's use of debt is 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. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for Matrix Service 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.
This article by Simply Wall St is general in nature. 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.