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. As with many other companies Materialise NV (NASDAQ:MTLS) makes use of debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. 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 examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Materialise Carry?
The image below, which you can click on for greater detail, shows that Materialise had debt of €104.5m at the end of December 2020, a reduction from €118.1m over a year. However, it does have €111.5m in cash offsetting this, leading to net cash of €7.05m.
A Look At Materialise's Liabilities
We can see from the most recent balance sheet that Materialise had liabilities of €84.4m falling due within a year, and liabilities of €110.1m due beyond that. Offsetting these obligations, it had cash of €111.5m as well as receivables valued at €30.9m due within 12 months. So it has liabilities totalling €52.2m more than its cash and near-term receivables, combined.
Given Materialise has a market capitalization of €1.58b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Materialise boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. 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.
Over 12 months, Materialise made a loss at the EBIT level, and saw its revenue drop to €170m, which is a fall of 13%. We would much prefer see growth.
So How Risky Is Materialise?
Although Materialise had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of €12m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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 example - Materialise has 2 warning signs we think you should be aware of.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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