Is Matrix Service (NASDAQ:MTRX) Using Too Much Debt?

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 can see that Matrix Service Company (NASDAQ:MTRX) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 Matrix Service

What Is Matrix Service's Debt?

The image below, which you can click on for greater detail, shows that at December 2022 Matrix Service had debt of US$15.0m, up from none in one year. But on the other hand it also has US$31.5m in cash, leading to a US$16.5m net cash position.

How Healthy Is Matrix Service's Balance Sheet?

The latest balance sheet data shows that Matrix Service had liabilities of US$208.6m due within a year, and liabilities of US$38.1m falling due after that. On the other hand, it had cash of US$31.5m and US$242.2m worth of receivables due within a year. So it can boast US$27.0m more liquid assets than total liabilities.

This surplus suggests that Matrix Service has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Matrix Service has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Matrix Service 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.

In the last year Matrix Service wasn't profitable at an EBIT level, but managed to grow its revenue by 19%, to US$780m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Matrix Service?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Matrix Service had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$89m and booked a US$61m accounting loss. With only US$16.5m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Matrix Service is showing 2 warning signs in our investment analysis , you should know about...

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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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.