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.

See our latest analysis for Matrix Composites & Engineering

What Is Matrix Composites & Engineering's Debt?

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 AU$15.4m net cash.

How Healthy Is Matrix Composites & Engineering's Balance Sheet?

We can see from the most recent balance sheet that Matrix Composites & Engineering had liabilities of AU$13.6m falling due within a year, and liabilities of AU$25.9m due beyond that. On the other hand, it had cash of AU$20.1m and AU$13.7m worth of receivables due within a year. So it has liabilities totalling AU$5.68m more than its cash and near-term receivables, combined.

Matrix Composites & Engineering has a market capitalization of AU$25.1m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Matrix Composites & Engineering boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Matrix Composites & Engineering'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.