Is Materion (NYSE: MTRN) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” So it can be obvious that you need to consider debt, when you think about how risky a given stock is because too much debt can sink a business. Like many other companies Materion Company (NYSE: MTRN) uses debt. But does this debt worry shareholders?

Why Does Debt Bring Risk?

Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. If things really go wrong, lenders can take over the business. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.

What is Materion’s net debt?

The image below, which you can click for more details, shows that Materion had a debt of US $ 79.6 million at the end of October 2021, a reduction from US $ 128.6 million on a year. However, it has $ 18.0 million in cash offsetting that, leading to net debt of around $ 61.6 million.

NYSE: MTRN Debt to Equity History December 25, 2021

A look at Materion’s responsibilities

We can see from the most recent balance sheet that Materion had $ 172.8 million in debt due within one year, and $ 312.5 million in debt due beyond. In return, he had $ 18.0 million in cash and $ 190.6 million in receivables due within 12 months. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by $ 276.6 million.

Considering that the listed Materion shares are worth a total of US $ 1.81 billion, it seems unlikely that this level of liabilities is a major threat. But there are enough liabilities that we would certainly recommend that shareholders continue to monitor the balance sheet going forward.

In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

Materion’s net debt is only 0.46 times its EBITDA. And its EBIT easily covers its interest costs, being 25.7 times higher. We could therefore say that he is no more threatened by his debt than an elephant is by a mouse. Best of all, Materion increased its EBIT by 133% last year, which is an impressive improvement. This boost will make it even easier to pay down debt in the future. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Materion can strengthen its balance sheet over time. So if you want to see what the professionals are thinking, you might find this free report on analysts’ earnings forecasts Be interesting.

Finally, while the IRS may love accounting profits, lenders only accept hard cash. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Materion has generated strong free cash flow equivalent to 50% of its EBIT, roughly what we expected. This hard cash allows him to reduce his debt whenever he wants.

Our point of view

The good news is that Materion’s demonstrated ability to cover interest costs with his EBIT delights us like a fluffy puppy does a toddler. And that’s just the start of good news as its EBIT growth rate is also very encouraging. Looking at the big picture, we think Materion’s use of debt looks very reasonable and we don’t care. While debt comes with risk, when used wisely, it can also generate a better return on equity. Of course, we wouldn’t say no to the extra trust we’d gain if we knew Materion insiders were buying stocks: if you’re on the same page, you can find out if insiders buy by clicking this link.

Of course, if you are the kind of investor who prefers to buy stocks without going into debt, then feel free to find out. our exclusive list of cash net growth stocks, today.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.

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John A. Bogar