Warren Buffett said: “Volatility is far from synonymous with risk. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. We note that Matrix IT Ltd. (TLV:MTRX) has debt on its balance sheet. But does this debt worry shareholders?
When is debt a problem?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. In the worst case, a company can go bankrupt if it cannot pay its creditors. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. The first step when considering a company’s debt levels is to consider its cash and debt together.
Check out our latest analysis for Matrix IT
What is Matrix IT’s debt?
You can click on the chart below for historical figures, but it shows that in March 2022, Matrix IT had debt of ₪1.10 billion, an increase of ₪848.0 million, year on year. On the other hand, he has ₪715.8 million in cash, resulting in a net debt of around ₪379.7 million.
How healthy is Matrix IT’s balance sheet?
We can see from the most recent balance sheet that Matrix IT had liabilities of ₪2.10 billion due within a year, and liabilities of ₪616.5 million due beyond. In return, he had ₪715.8 million in cash and ₪1.50 billion in debt due within 12 months. Thus, its liabilities outweigh the sum of its cash and receivables (short-term) by ₪503.8 million.
Considering that Matrix IT has a market capitalization of ₪5.52 billion, it is hard to believe that these liabilities pose a big threat. However, we think it’s worth keeping an eye on the strength of its balance sheet, as it can change over time.
We measure a company’s leverage against its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT ) covers its interest charge (interest coverage). Thus, we consider debt to earnings with and without amortization and depreciation expense.
Matrix IT has a low net debt to EBITDA ratio of just 0.94. And its EBIT covers its interest charges 12.1 times. So we’re pretty relaxed about his super conservative use of debt. And we also warmly note that Matrix IT increased its EBIT by 12% last year, making its leverage more manageable. When analyzing debt levels, the balance sheet is the obvious starting point. But it is the profits of Matrix IT that will influence the balance sheet in the future. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.
Finally, while the taxman may love accounting profits, lenders only accept cash. We must therefore clearly examine whether this EBIT generates a corresponding free cash flow. Over the past three years, Matrix IT has recorded free cash flow of 95% of its EBIT, which is higher than what we would normally expect. This puts him in a very strong position to repay his debt.
Our point of view
Matrix IT interest coverage suggests she can manage her debt as easily as Cristiano Ronaldo could score a goal against an Under-14 keeper. And the good news doesn’t stop there, since its conversion of EBIT into free cash flow also confirms this impression! Looking at the big picture, we think Matrix IT’s use of debt seems entirely reasonable and we’re not worried about that. Although debt carries risks, when used wisely it can also generate a higher return on equity. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. Example: we have identified 2 warning signs for Matrix IT you should be aware.
If you are interested in investing in businesses that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.