Stock Analysis

Materials Analysis Technology (GTSM:3587) Seems To Use Debt Quite Sensibly

TPEX:3587
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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Materials Analysis Technology Inc. (GTSM:3587) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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. 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.

Check out our latest analysis for Materials Analysis Technology

What Is Materials Analysis Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Materials Analysis Technology had NT$746.0m of debt, an increase on NT$661.2m, over one year. But on the other hand it also has NT$886.4m in cash, leading to a NT$140.4m net cash position.

debt-equity-history-analysis
GTSM:3587 Debt to Equity History January 7th 2021

A Look At Materials Analysis Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that Materials Analysis Technology had liabilities of NT$638.7m due within 12 months and liabilities of NT$723.2m due beyond that. Offsetting this, it had NT$886.4m in cash and NT$880.8m in receivables that were due within 12 months. So it can boast NT$405.3m more liquid assets than total liabilities.

This surplus suggests that Materials Analysis Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Materials Analysis Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

Another good sign is that Materials Analysis Technology has been able to increase its EBIT by 27% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Materials Analysis Technology's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Materials Analysis Technology 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. In the last three years, Materials Analysis Technology created free cash flow amounting to 3.7% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Materials Analysis Technology has NT$140.4m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 27% over the last year. So is Materials Analysis Technology's debt a risk? It doesn't seem so to us. 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. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for Materials Analysis Technology you should know about.

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.

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This article by Simply Wall St is general in nature. 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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About TPEX:3587

Materials Analysis Technology

Engages in the research and development, and intellectual property services in Taiwan, Mainland China, Japan, the United States, and internationally.

High growth potential with excellent balance sheet.

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