Is Everspin Technologies (NASDAQ:MRAM) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Everspin Technologies, Inc. (NASDAQ:MRAM) does carry debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Everspin Technologies

What Is Everspin Technologies's Net Debt?

The image below, which you can click on for greater detail, shows that Everspin Technologies had debt of US$5.46m at the end of September 2021, a reduction from US$7.90m over a year. But it also has US$14.6m in cash to offset that, meaning it has US$9.09m net cash.

A Look At Everspin Technologies' Liabilities

We can see from the most recent balance sheet that Everspin Technologies had liabilities of US$11.0m falling due within a year, and liabilities of US$2.60m due beyond that. Offsetting this, it had US$14.6m in cash and US$10.6m in receivables that were due within 12 months. So it can boast US$11.6m more liquid assets than total liabilities.

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

Notably, Everspin Technologies made a loss at the EBIT level, last year, but improved that to positive EBIT of US$64k in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Everspin Technologies 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Everspin Technologies 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. Happily for any shareholders, Everspin Technologies actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Everspin Technologies has net cash of US$9.09m, as well as more liquid assets than liabilities. The cherry on top was that in converted 4,627% of that EBIT to free cash flow, bringing in US$3.0m. So we don't have any problem with Everspin Technologies's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 3 warning signs we've spotted with Everspin Technologies .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.