We Think Maytronics (TLV:MTRN) Can Manage Its Debt With Ease

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Maytronics Ltd. (TLV:MTRN) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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

View our latest analysis for Maytronics

What Is Maytronics's Net Debt?

The image below, which you can click on for greater detail, shows that Maytronics had debt of ₪213.1m at the end of June 2021, a reduction from ₪225.7m over a year. However, it does have ₪286.6m in cash offsetting this, leading to net cash of ₪73.4m.

How Healthy Is Maytronics' Balance Sheet?

The latest balance sheet data shows that Maytronics had liabilities of ₪528.6m due within a year, and liabilities of ₪170.8m falling due after that. Offsetting these obligations, it had cash of ₪286.6m as well as receivables valued at ₪366.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪46.1m.

Having regard to Maytronics' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₪9.10b company is struggling for cash, we still think it's worth monitoring its balance sheet. 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 62% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Maytronics will need earnings to service that debt. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 ₪73.4m. And it impressed us with its EBIT growth of 62% 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.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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