Is Mathios Refractories (ATH:MATHIO) Weighed On By Its Debt Load?

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. As with many other companies Mathios Refractories S.A. (ATH:MATHIO) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Mathios Refractories

What Is Mathios Refractories's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Mathios Refractories had debt of €10.9m, up from €8.53m in one year. However, it also had €3.04m in cash, and so its net debt is €7.87m.

How Healthy Is Mathios Refractories' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Mathios Refractories had liabilities of €11.6m due within 12 months and liabilities of €4.52m due beyond that. Offsetting these obligations, it had cash of €3.04m as well as receivables valued at €4.98m due within 12 months. So its liabilities total €8.08m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the €4.10m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Mathios Refractories would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Mathios Refractories's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Mathios Refractories made a loss at the EBIT level, and saw its revenue drop to €12m, which is a fall of 29%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Mathios Refractories's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable €1.1m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through €14k in negative free cash flow over the last year. That means it's on the risky side of things. 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. We've identified 2 warning signs with Mathios Refractories , and understanding them should be part of your investment process.

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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