Maytronics (TLV:MTRN) Seems To Use Debt Rather Sparingly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Maytronics Ltd. (TLV:MTRN) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Maytronics

How Much Debt Does Maytronics Carry?

As you can see below, at the end of December 2020, Maytronics had ₪191.5m of debt, up from ₪95.1m a year ago. Click the image for more detail. But on the other hand it also has ₪244.8m in cash, leading to a ₪53.3m net cash position.

How Healthy Is Maytronics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Maytronics had liabilities of ₪411.0m due within 12 months and liabilities of ₪171.9m due beyond that. Offsetting this, it had ₪244.8m in cash and ₪107.0m in receivables that were due within 12 months. So its liabilities total ₪231.1m more than the combination of its cash and short-term receivables.

Of course, Maytronics has a market capitalization of ₪6.97b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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.

In addition to that, we're happy to report that Maytronics has boosted its EBIT by 44%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is Maytronics'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. While Maytronics has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Maytronics recorded free cash flow worth 62% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Maytronics has ₪53.3m in net cash. And it impressed us with its EBIT growth of 44% over the last year. 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.

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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