Warren Buffett said: “Volatility is far from synonymous with risk”. It’s only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Above all, Mineral Technologies Inc. (NYSE: MTX) is in debt. But the real question is whether this debt makes the business risky.
When Is Debt a Problem?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. 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. When we think of a business’s use of debt, we first look at cash flow and debt together.
What is the net debt of Minerals Technologies?
As you can see below, Minerals Technologies was in debt of $ 1.04 billion, as of October 2021, which is roughly the same as the year before. You can click on the graph for more details. However, he also had $ 311.3 million in cash, so his net debt is $ 725.3 million.
NYSE: MTX Debt to Equity History November 8, 2021
A look at the responsibilities of Minerals Technologies
According to the latest published balance sheet, Minerals Technologies had liabilities of US $ 423.3 million due within 12 months and liabilities of US $ 1.42 billion due beyond 12 months. In compensation for these obligations, he had cash of US $ 311.3 million as well as receivables valued at US $ 383.4 million within 12 months. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by US $ 1.14 billion.
While that may sound like a lot, it’s not so bad since Minerals Technologies has a market capitalization of US $ 2.56 billion, and could therefore likely strengthen its balance sheet by raising capital if needed. But we absolutely want to keep our eyes open for indications that its debt is too risky.
We use two main ratios to tell us about leverage versus earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). Thus, we consider debt versus earnings with and without amortization charges.
Minerals Technologies’ net debt stands at a very reasonable level of 2.2 times its EBITDA, while its EBIT only covered its interest expense 6.3 times last year. While this doesn’t worry us too much, it does suggest that the interest payments are somewhat of a burden. If Minerals Technologies can continue to grow its EBIT at the rate of 19% last year over last year, then it will find its debt more manageable. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Minerals Technologies can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Finally, a business needs free cash flow to repay its debts; accounting profits are not enough. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Minerals Technologies has generated strong free cash flow equivalent to 72% of its EBIT, roughly what we expected. This hard cash allows him to reduce his debt whenever he wants.
Our point of view
Minerals Technologies’ conversion of EBIT to free cash flow suggests that it can manage its debt as easily as Cristiano Ronaldo could score a goal against an Under-14 goalkeeper. But frankly, we think his total passive level undermines that feeling a bit. All these things considered, it looks like Minerals Technologies can comfortably manage its current debt levels. On the plus side, this leverage can increase returns to shareholders, but the potential downside is more risk of loss, so it’s worth watching the balance sheet. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. Concrete example: we have spotted 1 warning sign for Minerals Technologies you must be aware.
If you are interested in investing in companies that can generate profits without the burden of debt, check out this page. free list of growing companies that have net cash on the balance sheet.
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