Materialise (NASDAQ:MTLS) Has A Rock Solid 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Materialise NV (NASDAQ:MTLS) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Materialise

What Is Materialise's Debt?

You can click the graphic below for the historical numbers, but it shows that Materialise had €97.5m of debt in June 2021, down from €111.9m, one year before. But on the other hand it also has €182.8m in cash, leading to a €85.3m net cash position.

How Healthy Is Materialise's Balance Sheet?

According to the last reported balance sheet, Materialise had liabilities of €89.3m due within 12 months, and liabilities of €100.0m due beyond 12 months. Offsetting this, it had €182.8m in cash and €33.7m in receivables that were due within 12 months. So it actually has €27.2m 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. 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 grew its EBIT by 77% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. 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, a company can only pay off debt with cold hard cash, not accounting profits. 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. Happily for any shareholders, Materialise actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case Materialise has €85.3m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 336% of that EBIT to free cash flow, bringing in €14m. So is Materialise's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Materialise that you should be aware of.

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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