Does Matrix Composites & Engineering (ASX:MCE) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about. 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. We note that Matrix Composites & Engineering Ltd (ASX:MCE) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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.

Check out our latest analysis for Matrix Composites & Engineering

What Is Matrix Composites & Engineering's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2019 Matrix Composites & Engineering had AU$7.26m of debt, an increase on AU$3.82m, over one year. But on the other hand it also has AU$9.37m in cash, leading to a AU$2.11m net cash position.

How Strong Is Matrix Composites & Engineering's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Matrix Composites & Engineering had liabilities of AU$14.5m due within 12 months and liabilities of AU$723.3k due beyond that. Offsetting this, it had AU$9.37m in cash and AU$8.27m in receivables that were due within 12 months. So it actually has AU$2.47m more liquid assets than total liabilities.

This short term liquidity is a sign that Matrix Composites & Engineering could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Matrix Composites & Engineering has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Matrix Composites & Engineering can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Matrix Composites & Engineering managed to grow its revenue by 95%, to AU$38m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Matrix Composites & Engineering?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Matrix Composites & Engineering had negative earnings before interest and tax (EBIT), truth be told. And over the same period it saw negative free cash outflow of AU$7.4m and booked a AU$8.7m accounting loss. However, it has net cash of AU$2.11m, so it has a bit of time before it will need more capital. Matrix Composites & Engineering's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Matrix Composites & Engineering insider transactions.

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.

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.