David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Intel Corporation (NASDAQ:INTC) makes use of debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Intel's Debt?
The chart below, which you can click on for greater detail, shows that Intel had US$37.2b in debt in April 2022; about the same as the year before. But on the other hand it also has US$38.7b in cash, leading to a US$1.45b net cash position.
A Look At Intel's Liabilities
According to the last reported balance sheet, Intel had liabilities of US$29.3b due within 12 months, and liabilities of US$43.9b due beyond 12 months. Offsetting these obligations, it had cash of US$38.7b as well as receivables valued at US$7.86b due within 12 months. So its liabilities total US$26.7b more than the combination of its cash and short-term receivables.
Since publicly traded Intel shares are worth a very impressive total of US$170.3b, 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. While it does have liabilities worth noting, Intel also has more cash than debt, so we're pretty confident it can manage its debt safely.
On the other hand, Intel's EBIT dived 15%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Intel's ability to maintain a healthy balance sheet going forward. 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. While Intel 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, Intel produced sturdy free cash flow equating to 70% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.
While Intel does have more liabilities than liquid assets, it also has net cash of US$1.45b. The cherry on top was that in converted 70% of that EBIT to free cash flow, bringing in US$9.8b. So we are not troubled with Intel's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Intel (1 is potentially serious) 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.
What are the risks and opportunities for Intel?
Price-To-Earnings ratio (14.5x) is below the US market (15.1x)
Earnings are forecast to grow 10.52% per year
Profit margins (12.7%) are lower than last year (25.5%)
Large one-off items impacting financial results
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