These 4 Measures Indicate That STMicroelectronics (EPA:STMPA) Is Using Debt Reasonably Well

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:STMPA) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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.

View our latest analysis for STMicroelectronics

What Is STMicroelectronics's Debt?

As you can see below, STMicroelectronics had US$2.89b of debt, at December 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$6.18b in cash offsetting this, leading to net cash of US$3.30b.

A Look At STMicroelectronics' Liabilities

The latest balance sheet data shows that STMicroelectronics had liabilities of US$3.77b due within a year, and liabilities of US$3.29b falling due after that. Offsetting these obligations, it had cash of US$6.18b as well as receivables valued at US$2.44b due within 12 months. So it can boast US$1.56b more liquid assets than total liabilities.

This short term liquidity is a sign that STMicroelectronics could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, STMicroelectronics boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that STMicroelectronics's load is not too heavy, because its EBIT was down 64% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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, a company can only pay off debt with cold hard cash, not accounting profits. 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. Looking at the most recent three years, STMicroelectronics recorded free cash flow of 26% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that STMicroelectronics has net cash of US$3.30b, as well as more liquid assets than liabilities. So we don't have any problem with STMicroelectronics's use of debt. 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. For example - STMicroelectronics has 2 warning signs we think you should be aware of.

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.