Stock Analysis

Does Matthews International (NASDAQ:MATW) Have A Healthy Balance Sheet?

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NasdaqGS:MATW
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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Matthews International Corporation (NASDAQ:MATW) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

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What Is Matthews International's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Matthews International had US$822.1m of debt in December 2020, down from US$964.3m, one year before. On the flip side, it has US$41.2m in cash leading to net debt of about US$780.9m.

debt-equity-history-analysis
NasdaqGS:MATW Debt to Equity History March 11th 2021

How Healthy Is Matthews International's Balance Sheet?

According to the last reported balance sheet, Matthews International had liabilities of US$332.1m due within 12 months, and liabilities of US$1.13b due beyond 12 months. Offsetting these obligations, it had cash of US$41.2m as well as receivables valued at US$305.4m due within 12 months. So its liabilities total US$1.12b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of US$1.34b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

While Matthews International's debt to EBITDA ratio (4.6) suggests that it uses some debt, its interest cover is very weak, at 2.4, suggesting high leverage. It seems that the business incurs large depreciation and amortisation charges, so maybe its debt load is heavier than it would first appear, since EBITDA is arguably a generous measure of earnings. It seems clear that the cost of borrowing money is negatively impacting returns for shareholders, of late. Fortunately, Matthews International grew its EBIT by 2.0% in the last year, slowly shrinking its debt relative to earnings. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Matthews International 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, a company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. Happily for any shareholders, Matthews International actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our View

Neither Matthews International's ability to cover its interest expense with its EBIT nor its net debt to EBITDA gave us confidence in its ability to take on more debt. But the good news is it seems to be able to convert EBIT to free cash flow with ease. Looking at all the angles mentioned above, it does seem to us that Matthews International is a somewhat risky investment as a result of its debt. Not all risk is bad, as it can boost share price returns if it pays off, but this debt risk is worth keeping in mind. 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. We've identified 3 warning signs with Matthews International (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

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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What are the risks and opportunities for Matthews International?

Matthews International Corporation provides brand solutions, memorialization products, and industrial technologies worldwide.

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Rewards

  • Earnings are forecast to grow 105.42% per year

Risks

  • Interest payments are not well covered by earnings

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