Here's Why Materialise (NASDAQ:MTLS) Can Manage Its Debt Responsibly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Materialise NV (NASDAQ:MTLS) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Materialise

What Is Materialise's Net Debt?

As you can see below, Materialise had €67.4m of debt at March 2023, down from €84.6m a year prior. However, it does have €141.7m in cash offsetting this, leading to net cash of €74.4m.

How Healthy Is Materialise's Balance Sheet?

The latest balance sheet data shows that Materialise had liabilities of €105.1m due within a year, and liabilities of €69.5m falling due after that. Offsetting these obligations, it had cash of €141.7m as well as receivables valued at €47.8m due within 12 months. So it actually has €14.9m more liquid assets than total liabilities.

This short term liquidity is a sign that Materialise could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Materialise has more cash than debt is arguably a good indication that it can manage its debt safely.

Importantly, Materialise's EBIT fell a jaw-dropping 88% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Materialise'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. While Materialise 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. Over the last three years, Materialise actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Materialise has €74.4m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 196% of that EBIT to free cash flow, bringing in -€2.3m. So we don't have any problem with Materialise's use of debt. 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 Materialise that you should be aware of.

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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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.