Does Mastech Digital (NYSEMKT:MHH) Have A Healthy Balance Sheet?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Mastech Digital, Inc. (NYSEMKT:MHH) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Mastech Digital

How Much Debt Does Mastech Digital Carry?

As you can see below, Mastech Digital had US$17.3m of debt at December 2020, down from US$25.3m a year prior. However, it also had US$7.68m in cash, and so its net debt is US$9.60m.

How Strong Is Mastech Digital's Balance Sheet?

The latest balance sheet data shows that Mastech Digital had liabilities of US$22.0m due within a year, and liabilities of US$20.5m falling due after that. On the other hand, it had cash of US$7.68m and US$32.1m worth of receivables due within a year. So its liabilities total US$2.70m more than the combination of its cash and short-term receivables.

Having regard to Mastech Digital's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$203.8m company is struggling for cash, we still think it's worth monitoring its balance sheet.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Mastech Digital has a low net debt to EBITDA ratio of only 0.54. And its EBIT covers its interest expense a whopping 16.2 times over. So we're pretty relaxed about its super-conservative use of debt. Also positive, Mastech Digital grew its EBIT by 30% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Mastech Digital'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. So we always check how much of that EBIT is translated into free cash flow. During the last three years, Mastech Digital generated free cash flow amounting to a very robust 99% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Our View

Happily, Mastech Digital's impressive interest cover implies it has the upper hand on its debt. And that's just the beginning of the good news since its conversion of EBIT to free cash flow is also very heartening. We think Mastech Digital is no more beholden to its lenders, than the birds are to birdwatchers. To our minds it has a healthy happy balance sheet. Another factor that would give us confidence in Mastech Digital would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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