Warren Buffett famously said, '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 can see that Mannatech, Incorporated (NASDAQ:MTEX) does use debt in its business. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Mannatech Carry?
The image below, which you can click on for greater detail, shows that Mannatech had debt of US$1.46m at the end of June 2019, a reduction from US$2.05m over a year. However, its balance sheet shows it holds US$25.0m in cash, so it actually has US$23.6m net cash.
How Strong Is Mannatech's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Mannatech had liabilities of US$33.9m due within 12 months and liabilities of US$6.11m due beyond that. Offsetting these obligations, it had cash of US$25.0m as well as receivables valued at US$254.0k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$14.7m.
Mannatech has a market capitalization of US$40.4m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Mannatech boasts net cash, so it's fair to say it does not have a heavy debt load!
Better yet, Mannatech grew its EBIT by 213% 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 you can't view debt in total isolation; since Mannatech will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Mannatech 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. Over the last three years, Mannatech recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for and improvement.
While Mannatech does have more liabilities than liquid assets, it also has net cash of US$24m. And it impressed us with its EBIT growth of 213% over the last year. So we are not troubled with Mannatech's debt use. We'd be motivated to research the stock further if we found out that Mannatech insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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