Matrix Holdings (HKG:1005) Seems To Use Debt Quite 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. As with many other companies Matrix Holdings Limited (HKG:1005) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 Matrix Holdings

How Much Debt Does Matrix Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Matrix Holdings had HK$12.6m of debt in December 2020, down from HK$23.0m, one year before. But it also has HK$154.7m in cash to offset that, meaning it has HK$142.1m net cash.

How Healthy Is Matrix Holdings' Balance Sheet?

We can see from the most recent balance sheet that Matrix Holdings had liabilities of HK$194.1m falling due within a year, and liabilities of HK$64.6m due beyond that. Offsetting this, it had HK$154.7m in cash and HK$235.7m in receivables that were due within 12 months. So it can boast HK$131.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Matrix Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Matrix Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

Shareholders should be aware that Matrix Holdings's EBIT was down 92% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Matrix Holdings'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Matrix Holdings 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. Happily for any shareholders, Matrix Holdings actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Matrix Holdings has net cash of HK$142.1m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of HK$76m, being 129% of its EBIT. So we are not troubled with Matrix Holdings's debt use. 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 Matrix Holdings has 4 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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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