Maytronics (TLV:MTRN) Could Easily Take On More Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Maytronics Ltd. (TLV:MTRN) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Maytronics

What Is Maytronics's Net Debt?

As you can see below, at the end of September 2021, Maytronics had ₪277.0m of debt, up from ₪123.5m a year ago. Click the image for more detail. However, it does have ₪342.7m in cash offsetting this, leading to net cash of ₪65.7m.

A Look At Maytronics' Liabilities

The latest balance sheet data shows that Maytronics had liabilities of ₪570.2m due within a year, and liabilities of ₪196.1m falling due after that. On the other hand, it had cash of ₪342.7m and ₪253.1m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪170.5m.

Since publicly traded Maytronics shares are worth a total of ₪7.30b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Maytronics also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Maytronics grew its EBIT by 46% 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 it is Maytronics's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Maytronics 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, Maytronics produced sturdy free cash flow equating to 62% 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.

Summing up

We could understand if investors are concerned about Maytronics's liabilities, but we can be reassured by the fact it has has net cash of ₪65.7m. And we liked the look of last year's 46% year-on-year EBIT growth. So we don't think Maytronics's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Maytronics, you may well want to click here to check an interactive graph of its earnings per share history.

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.

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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.