STMicroelectronics (EPA:STM) Could Easily Take On More Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that STMicroelectronics N.V. (EPA:STM) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for STMicroelectronics

What Is STMicroelectronics's Debt?

The image below, which you can click on for greater detail, shows that STMicroelectronics had debt of US$2.55b at the end of April 2022, a reduction from US$2.97b over a year. But it also has US$3.39b in cash to offset that, meaning it has US$840.0m net cash.

How Strong Is STMicroelectronics' Balance Sheet?

According to the last reported balance sheet, STMicroelectronics had liabilities of US$3.07b due within 12 months, and liabilities of US$3.32b due beyond 12 months. On the other hand, it had cash of US$3.39b and US$1.81b worth of receivables due within a year. So it has liabilities totalling US$1.19b more than its cash and near-term receivables, combined.

Of course, STMicroelectronics has a titanic market capitalization of US$34.0b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, STMicroelectronics boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, STMicroelectronics grew its EBIT by 81% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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 46% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

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$840.0m. And it impressed us with its EBIT growth of 81% 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. However, not all investment risk resides within the balance sheet - far from it. Be aware that STMicroelectronics is showing 1 warning sign in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.