Matrix Composites & Engineering (ASX:MCE) Has Debt But No Earnings; Should You Worry?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Matrix Composites & Engineering Ltd (ASX:MCE) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Matrix Composites & Engineering

How Much Debt Does Matrix Composites & Engineering Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Matrix Composites & Engineering had AU$9.34m of debt, an increase on AU$8.39m, over one year. But on the other hand it also has AU$23.3m in cash, leading to a AU$13.9m net cash position.

A Look At Matrix Composites & Engineering's Liabilities

According to the last reported balance sheet, Matrix Composites & Engineering had liabilities of AU$15.6m due within 12 months, and liabilities of AU$42.2m due beyond 12 months. On the other hand, it had cash of AU$23.3m and AU$8.64m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$26.0m.

While this might seem like a lot, it is not so bad since Matrix Composites & Engineering has a market capitalization of AU$75.7m, and so it could probably strengthen its balance sheet by raising capital if it needed to. 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! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Matrix Composites & Engineering's ability to maintain a healthy balance sheet going forward. 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 132%, to AU$62m. So its pretty obvious shareholders are hoping for more growth!

So How Risky Is Matrix Composites & Engineering?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Matrix Composites & Engineering had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of AU$3.1m and booked a AU$5.2m accounting loss. Given it only has net cash of AU$13.9m, the company may need to raise more capital if it doesn't reach break-even soon. Importantly, Matrix Composites & Engineering's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. 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. For example, we've discovered 2 warning signs for Matrix Composites & Engineering (1 shouldn't be ignored!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.