Is STMicroelectronics (EPA:STM) A Risky Investment?

Warren Buffett famously said, '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. As with many other companies STMicroelectronics N.V. (EPA:STM) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for STMicroelectronics

What Is STMicroelectronics's Net Debt?

You can click the graphic below for the historical numbers, but it shows that STMicroelectronics had US$2.66b of debt in October 2021, down from US$2.87b, one year before. But on the other hand it also has US$3.46b in cash, leading to a US$798.0m net cash position.

How Strong Is STMicroelectronics' Balance Sheet?

The latest balance sheet data shows that STMicroelectronics had liabilities of US$2.85b due within a year, and liabilities of US$3.45b falling due after that. Offsetting this, it had US$3.46b in cash and US$1.61b in receivables that were due within 12 months. So it has liabilities totalling US$1.23b more than its cash and near-term receivables, combined.

Since publicly traded STMicroelectronics shares are worth a very impressive total of US$44.4b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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.

On top of that, STMicroelectronics grew its EBIT by 92% over the last twelve months, and that growth will make it easier to handle its debt. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept 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. During the last three years, STMicroelectronics produced sturdy free cash flow equating to 56% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that STMicroelectronics has US$798.0m in net cash. And it impressed us with its EBIT growth of 92% over the last year. So we don't think STMicroelectronics's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with STMicroelectronics .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.