We Think Materialise (NASDAQ:MTLS) Can Manage Its Debt With Ease

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. 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 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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Materialise

What Is Materialise's Debt?

The image below, which you can click on for greater detail, shows that Materialise had debt of €81.7m at the end of June 2022, a reduction from €97.5m over a year. But it also has €168.1m in cash to offset that, meaning it has €86.5m net cash.

How Healthy Is Materialise's Balance Sheet?

The latest balance sheet data shows that Materialise had liabilities of €102.1m due within a year, and liabilities of €82.8m falling due after that. Offsetting this, it had €168.1m in cash and €41.8m in receivables that were due within 12 months. So it can boast €25.1m 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!

In addition to that, we're happy to report that Materialise has boosted its EBIT by 84%, thus reducing the spectre of future debt repayments. 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're focused on the future you can check out this free report showing analyst profit forecasts.

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. 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 we empathize with investors who find debt concerning, you should keep in mind that Materialise has net cash of €86.5m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of €15m, being 276% of its EBIT. So is Materialise's debt a risk? It doesn't seem so to us. 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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.