Is Matrix Composites & Engineering (ASX:MCE) Using Debt Sensibly?

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. Importantly, Matrix Composites & Engineering Ltd (ASX:MCE) does carry debt. But the real question is whether this debt is making the company risky.

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Matrix Composites & Engineering

What Is Matrix Composites & Engineering's Debt?

As you can see below, at the end of June 2023, Matrix Composites & Engineering had AU$8.85m of debt, up from none a year ago. Click the image for more detail. However, it does have AU$20.0m in cash offsetting this, leading to net cash of AU$11.2m.

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

The latest balance sheet data shows that Matrix Composites & Engineering had liabilities of AU$15.7m due within a year, and liabilities of AU$37.5m falling due after that. On the other hand, it had cash of AU$20.0m and AU$21.7m worth of receivables due within a year. So it has liabilities totalling AU$11.4m more than its cash and near-term receivables, combined.

Matrix Composites & Engineering has a market capitalization of AU$48.3m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Matrix Composites & Engineering boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Composites & Engineering 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.

In the last year Matrix Composites & Engineering wasn't profitable at an EBIT level, but managed to grow its revenue by 65%, to AU$47m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Matrix Composites & Engineering?

While Matrix Composites & Engineering lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of AU$8.7m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. One positive is that Matrix Composites & Engineering is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But that doesn't change our opinion that the stock is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Matrix Composites & Engineering (of which 2 are concerning!) 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.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.