Materials Analysis Technology (GTSM:3587) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, '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. As with many other companies Materials Analysis Technology Inc. (GTSM:3587) makes use of debt. 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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Materials Analysis Technology

How Much Debt Does Materials Analysis Technology Carry?

As you can see below, Materials Analysis Technology had NT$713.4m of debt at December 2020, down from NT$833.4m a year prior. But on the other hand it also has NT$1.20b in cash, leading to a NT$481.7m net cash position.

How Strong Is Materials Analysis Technology's Balance Sheet?

According to the last reported balance sheet, Materials Analysis Technology had liabilities of NT$752.1m due within 12 months, and liabilities of NT$715.5m due beyond 12 months. Offsetting these obligations, it had cash of NT$1.20b as well as receivables valued at NT$908.4m due within 12 months. So it can boast NT$635.9m more liquid assets than total liabilities.

This short term liquidity is a sign that Materials Analysis Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. 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.

On top of that, Materials Analysis Technology grew its EBIT by 36% 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 ultimately the future profitability of the business will decide if Materials Analysis Technology can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Materials Analysis Technology 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. In the last three years, Materials Analysis Technology's free cash flow amounted to 37% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Materials Analysis Technology has net cash of NT$481.7m, as well as more liquid assets than liabilities. And we liked the look of last year's 36% year-on-year EBIT growth. 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. For instance, we've identified 2 warning signs for Materials Analysis Technology that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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