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 synonymous with risk.” So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. We notice that Mineral Technologies Inc. (NYSE:MTX) has debt on its balance sheet. 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. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. 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. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we look at debt levels, we first consider cash and debt levels, together.
Discover our latest analysis for Minerals Technologies
What is Minerals Technologies debt?
As you can see below, at the end of December 2021, Minerals Technologies had $1.02 billion in debt, up from $941.9 million a year ago. Click on the image for more details. However, since he has a cash reserve of $304.4 million, his net debt is less, at around $712.6 million.
How strong is Minerals Technologies’ balance sheet?
According to the last published balance sheet, Minerals Technologies had liabilities of $419.8 million due within 12 months and liabilities of $1.37 billion due beyond 12 months. On the other hand, it had a cash position of 304.4 million dollars and 367.8 million dollars of receivables at less than one year. It therefore has liabilities totaling $1.12 billion more than its cash and short-term receivables, combined.
While that might sound like a lot, it’s not that bad since Minerals Technologies has a market capitalization of US$2.31 billion, so it could probably bolster its balance sheet by raising capital if needed. However, it is always worth taking a close look at its ability to repay debt.
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). The advantage of this approach is that we consider both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio ).
Minerals Technologies has net debt worth 2.1x EBITDA, which isn’t too much, but its interest coverage looks a little low, with EBIT at just 6.5x expense. interests. While these numbers don’t alarm us, it’s worth noting that the cost of corporate debt has a real impact. If Minerals Technologies can continue to grow EBIT at last year’s rate of 15% over last year, then it will find its leverage more manageable. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Minerals Technologies can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. We must therefore clearly examine whether this EBIT generates a corresponding free cash flow. Over the past three years, Minerals Technologies has recorded free cash flow of 73% of its EBIT, which is about normal, given that free cash flow excludes interest and taxes. This free cash flow puts the company in a good position to repay its debt, should it arise.
Our point of view
Fortunately, Minerals Technologies’ impressive EBIT to free cash flow conversion means it has the upper hand on its debt. But truth be told, we think his total passive level undermines that impression a bit. All things considered, it looks like Minerals Technologies can comfortably manage its current level of debt. Of course, while this leverage can improve return on equity, it comes with more risk, so it’s worth keeping an eye out for. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. Know that Minerals Technologies shows 1 warning sign in our investment analysis you should know…
Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient 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 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.
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