These 4 Measures Indicate That Materialise (NASDAQ:MTLS) Is Using Debt Safely

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Materialise

What Is Materialise's Net Debt?

The image below, which you can click on for greater detail, shows that Materialise had debt of €45.2m at the end of September 2024, a reduction from €58.7m over a year. However, its balance sheet shows it holds €116.2m in cash, so it actually has €71.0m net cash.

How Healthy Is Materialise's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Materialise had liabilities of €107.8m due within 12 months and liabilities of €39.8m due beyond that. Offsetting these obligations, it had cash of €116.2m as well as receivables valued at €49.8m due within 12 months. So it can boast €18.3m 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. Succinctly put, Materialise boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Materialise grew its EBIT by 323% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. 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'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. 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. During the last three years, Materialise produced sturdy free cash flow equating to 59% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Materialise has €71.0m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 323% over the last year. So we don't think Materialise's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Materialise has 1 warning sign we think 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.