Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. 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. Above all, Matrix IT Ltd. (TLV:MTRX) is in debt. But does this debt worry shareholders?
When is debt a problem?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. The first step when considering a company’s debt levels is to consider its cash and debt together.
See our latest analysis for Matrix IT
What is Matrix IT’s debt?
You can click on the chart below for historical numbers, but it shows that as of September 2021, Matrix IT had ₪1.02 billion in debt, an increase of ₪950.6 million, year on year. However, since he has a cash reserve of ₪542.3 million, his net debt is lower at around ₪475.4 million.
How healthy is Matrix IT’s balance sheet?
According to the latest published balance sheet, Matrix IT had liabilities of ₪1.75 billion due within 12 months and liabilities of ₪656.1 million due beyond 12 months. On the other hand, it had a cash position of ₪542.3 million and ₪1.41 billion in receivables within one year. It therefore has liabilities totaling $458.2 million more than its cash and short-term receivables, combined.
Given that Matrix IT has a market cap of €5.54 billion, it’s hard to believe that these liabilities pose a threat. But there are enough liabilities that we certainly recommend that shareholders continue to monitor the balance sheet in the future.
We use two main ratios to inform us about debt to earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is how often its earnings before interest and taxes (EBIT) covers its interest expense (or its interests, for short). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
Matrix IT’s net debt is only 1.3 times its EBITDA. 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 17% last year, making its leverage more manageable. The balance sheet is clearly the area to focus on when analyzing debt. But you can’t look at debt in total isolation; as Matrix IT will need revenue to repay this debt. So, if you want to know more about its earnings, it may be worth checking out this graph of its long-term trend.
Finally, while the taxman may love accounting profits, lenders only accept cash. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Matrix IT has generated free cash flow of 97% of its EBIT, more than expected. This positions him well to pay off debt if desired.
Our point of view
Fortunately, Matrix IT’s impressive interest coverage means it has the upper hand on its debt. And the good news does not stop there, since its conversion of EBIT into free cash flow also confirms this impression! Zooming out, Matrix IT seems to be using debt quite sensibly; and that gets the green light from us. After all, reasonable leverage can increase return on equity. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. For example, we found 2 warning signs for Matrix IT which you should be aware of before investing here.
In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% free, at present.
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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.