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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies STMicroelectronics N.V. (EPA:STM) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

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What Is STMicroelectronics's Debt?

The chart below, which you can click on for greater detail, shows that STMicroelectronics had US$2.60b in debt in October 2022; about the same as the year before. However, its balance sheet shows it holds US$4.09b in cash, so it actually has US$1.49b net cash.

How Strong Is STMicroelectronics' Balance Sheet?

We can see from the most recent balance sheet that STMicroelectronics had liabilities of US$3.84b falling due within a year, and liabilities of US$3.46b due beyond that. On the other hand, it had cash of US$4.09b and US$2.23b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$985.0m.

Since publicly traded STMicroelectronics shares are worth a very impressive total of US$34.9b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, STMicroelectronics boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that STMicroelectronics has boosted its EBIT by 82%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine STMicroelectronics's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While STMicroelectronics has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, STMicroelectronics's free cash flow amounted to 46% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

We could understand if investors are concerned about STMicroelectronics's liabilities, but we can be reassured by the fact it has has net cash of US$1.49b. And we liked the look of last year's 82% year-on-year EBIT growth. So we don't think STMicroelectronics's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. 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 you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.