Does STMicroelectronics (EPA:STM) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that STMicroelectronics N.V. (EPA:STM) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for STMicroelectronics

What Is STMicroelectronics's Debt?

You can click the graphic below for the historical numbers, but it shows that STMicroelectronics had US$2.52b of debt in July 2022, down from US$3.17b, one year before. But on the other hand it also has US$3.44b in cash, leading to a US$924.0m net cash position.

A Look At STMicroelectronics' Liabilities

Zooming in on the latest balance sheet data, we can see that STMicroelectronics had liabilities of US$3.71b due within 12 months and liabilities of US$3.34b due beyond that. Offsetting these obligations, it had cash of US$3.44b as well as receivables valued at US$2.07b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.54b.

Given STMicroelectronics has a humongous market capitalization of US$34.6b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, STMicroelectronics also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that STMicroelectronics has boosted its EBIT by 74%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if STMicroelectronics can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. STMicroelectronics may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, STMicroelectronics's free cash flow amounted to 45% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that STMicroelectronics has US$924.0m in net cash. And it impressed us with its EBIT growth of 74% over the last year. So we don't think STMicroelectronics's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that STMicroelectronics is showing 1 warning sign in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.