David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Melexis NV (EBR:MELE) does carry debt. But should shareholders be worried about its use of debt?
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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Melexis's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Melexis had €30.0m of debt in June 2021, down from €62.0m, one year before. But on the other hand it also has €59.0m in cash, leading to a €29.0m net cash position.
How Strong Is Melexis' Balance Sheet?
According to the last reported balance sheet, Melexis had liabilities of €60.4m due within 12 months, and liabilities of €34.1m due beyond 12 months. Offsetting this, it had €59.0m in cash and €100.1m in receivables that were due within 12 months. So it can boast €64.7m more liquid assets than total liabilities.
This state of affairs indicates that Melexis' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the €4.21b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Melexis boasts net cash, so it's fair to say it does not have a heavy debt load!
On top of that, Melexis grew its EBIT by 59% over the last twelve months, and that growth will make it easier to handle its debt. 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 Melexis 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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Melexis may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Melexis produced sturdy free cash flow equating to 76% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.
While it is always sensible to investigate a company's debt, in this case Melexis has €29.0m in net cash and a decent-looking balance sheet. And we liked the look of last year's 59% year-on-year EBIT growth. So we don't think Melexis's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Melexis that you should be aware of before investing here.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.
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