David Iben put it well when he said, ‘Volatility is not a risk we care about. What we care about is avoiding the 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. We note that Metals X Limited ( ASX:MLX ) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company’s use of debt, we first look at cash and debt together.
Check out our latest analysis for Metals X
What Is Metals X’s Net Debt?
As you can see below, Metals X had AU$3.56m of debt at June 2022, down from AU$15.5m a year prior. But it also has AU$122.2m in cash to offset that, meaning it has AU$118.7m net cash.
A Look At Metals X’s Liabilities
The latest balance sheet data shows that Metals X had liabilities of AU$24.7m due within a year, and liabilities of AU$17.3m falling due after that. On the other hand, it had cash of AU$122.2m and AU$12.0m worth of receivables due within a year. So it actually has AU$92.3m more liquid assets than total liabilities.
This surplus strongly suggests that Metals X has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Metals X boasts net cash, so it’s fair to say it does not have a heavy debt load!
Better yet, Metals X grew its EBIT by 937% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Metals X’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 .
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Metals X 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. During the last two years, Metals X produced sturdy free cash flow equating to 68% of its EBIT, about what we’d expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.
While we empathize with investors who find debt concerning, you should keep in mind that Metals X has net cash of AU$118.7m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 937% over the last year. The bottom line is that we do not find Metals X’s debt levels at all concerning. There’s no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we’ve identified 1 warning sign for Metals X that you should be aware of.
If you’re interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet .
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.
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