Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Matrix Composites & Engineering Ltd (ASX:MCE) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.
The image below, which you can click on for greater detail, shows that Matrix Composites & Engineering had debt of AU$4.71m at the end of December 2019, a reduction from AU$7.37m over a year. But it also has AU$20.1m in cash to offset that, meaning it has computer science vs software engineering net cash.
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.
The image below, which you can click on for greater detail, shows that Matrix Composites & Engineering had debt of AU$4.71m at the end of December 2019, a reduction from AU$7.37m over a year. But it also has AU$20.1m in cash to offset that, meaning it has computer science vs software engineering net cash.
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