These 4 Measures Indicate That Montauk Renewables (NASDAQ:MNTK) Is Using Debt Reasonably Well

Warren Buffett famously said, '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. As with many other companies Montauk Renewables, Inc. (NASDAQ:MNTK) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Montauk Renewables

What Is Montauk Renewables's Net Debt?

As you can see below, Montauk Renewables had US$61.5m of debt at March 2024, down from US$69.4m a year prior. But it also has US$64.0m in cash to offset that, meaning it has US$2.51m net cash.

How Healthy Is Montauk Renewables' Balance Sheet?

According to the last reported balance sheet, Montauk Renewables had liabilities of US$33.8m due within 12 months, and liabilities of US$66.6m due beyond 12 months. Offsetting this, it had US$64.0m in cash and US$9.77m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$26.5m.

Of course, Montauk Renewables has a market capitalization of US$804.1m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Montauk Renewables boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Montauk Renewables grew its EBIT by 10% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Montauk Renewables 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Montauk Renewables 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. In the last three years, Montauk Renewables's free cash flow amounted to 49% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Montauk Renewables has US$2.51m in net cash. And it also grew its EBIT by 10% over the last year. So we are not troubled with Montauk Renewables's debt use. 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. To that end, you should be aware of the 1 warning sign we've spotted with Montauk Renewables .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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