Materialise (NASDAQ:MTLS) Has A Pretty 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.' 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. Importantly, Materialise NV (NASDAQ:MTLS) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Our analysis indicates that MTLS is potentially overvalued!

What Is Materialise's Net Debt?

The image below, which you can click on for greater detail, shows that Materialise had debt of €75.7m at the end of September 2022, a reduction from €93.5m over a year. However, its balance sheet shows it holds €150.6m in cash, so it actually has €74.9m net cash.

A Look At Materialise's Liabilities

The latest balance sheet data shows that Materialise had liabilities of €103.7m due within a year, and liabilities of €75.3m falling due after that. On the other hand, it had cash of €150.6m and €42.3m worth of receivables due within a year. So it can boast €13.9m more liquid assets than total liabilities.

This surplus suggests that Materialise has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Materialise boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Materialise if management cannot prevent a repeat of the 54% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Materialise 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Materialise may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. 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 we empathize with investors who find debt concerning, you should keep in mind that Materialise has net cash of €74.9m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of €8.0m, being 241% of its EBIT. So we don't have any problem with Materialise's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Materialise, you may well want to click here to check an interactive graph of its earnings per share history.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.