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You Might Like Materialise NV (NASDAQ:MTLS) But Do You Like Its Debt?

Simply Wall St

While small-cap stocks, such as Materialise NV (NASDAQ:MTLS) with its market cap of US$859m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into MTLS here.

Does MTLS Produce Much Cash Relative To Its Debt?

Over the past year, MTLS has ramped up its debt from €95m to €106m , which includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at €116m to keep the business going. On top of this, MTLS has generated cash from operations of €28m over the same time period, leading to an operating cash to total debt ratio of 27%, indicating that MTLS’s operating cash is sufficient to cover its debt.

Does MTLS’s liquid assets cover its short-term commitments?

With current liabilities at €73m, the company has been able to meet these obligations given the level of current assets of €169m, with a current ratio of 2.32x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Software companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

NasdaqGS:MTLS Historical Debt, April 15th 2019

Is MTLS’s debt level acceptable?

With debt reaching 78% of equity, MTLS may be thought of as relatively highly levered. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if MTLS’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For MTLS, the ratio of 4.17x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving MTLS ample headroom to grow its debt facilities.

Next Steps:

MTLS’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around MTLS's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for MTLS's financial health. Other important fundamentals need to be considered alongside. You should continue to research Materialise to get a more holistic view of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for MTLS’s future growth? Take a look at our free research report of analyst consensus for MTLS’s outlook.
  2. Valuation: What is MTLS worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether MTLS is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.