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David Iben put it well when he said, ‘Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.’ 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. As with many other companies. Match Group, Inc. (NASDAQ:MTCH) makes use of debt. But the real question is whether this debt is making the company risky.
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.
What Is Match Group’s Debt?
As you can see below, at the end of March 2019, Match Group had US$1.60b of debt, up from US$1.25b a year ago. Click the image for more detail. However, it does have US$224.9m in cash offsetting this, leading to net debt of about US$1.38b.
How Healthy Is Match Group’s Balance Sheet?
According to the last reported balance sheet, Match Group had liabilities of US$380.7m due within 12 months, and liabilities of US$1.69b due beyond 12 months. On the other hand, it had cash of US$224.9m and US$147.1m worth of receivables due within a year. So its liabilities total US$1.70b more than the combination of its cash and short-term receivables.
Since publicly traded Match Group shares are worth a very impressive total of US$20.3b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Because it carries more debt than cash, we think it’s worth watching Match Group’s balance sheet over time.
We measure a company’s debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
With a debt to EBITDA ratio of 2.32, Match Group uses debt artfully but responsibly. And the fact that its trailing twelve months of EBIT was 7.65 times its interest expenses harmonizes with that theme. It is well worth noting that Match Group’s EBIT shot up like bamboo after rain, gaining 37% in the last twelve months. That’ll make it easier to manage its debt. 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 Match Group can strengthen its balance sheet over time. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it’s worth checking how much of that EBIT is backed by free cash flow. During the last three years, Match Group generated free cash flow amounting to a very robust 84% of its EBIT, more than we’d expect. That puts it in a very strong position to pay down debt.
The good news is that Match Group’s demonstrated ability to convert EBIT to free cash flow delights us like a fluffy puppy does a toddler. And the good news does not stop there, as its EBIT growth rate also supports that impression! Zooming out, Match Group seems to use debt quite reasonably; and that gets the nod from us. After all, sensible leverage can boost returns on equity. We’d be very excited to see if Match Group insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.
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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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.