We Think Everspin Technologies (NASDAQ:MRAM) Can Manage Its Debt With Ease

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Everspin Technologies, Inc. (NASDAQ:MRAM) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Our analysis indicates that MRAM is potentially undervalued!

What Is Everspin Technologies's Debt?

As you can see below, Everspin Technologies had US$3.76m of debt at June 2022, down from US$6.96m a year prior. However, its balance sheet shows it holds US$23.1m in cash, so it actually has US$19.3m net cash.

How Healthy Is Everspin Technologies' Balance Sheet?

According to the last reported balance sheet, Everspin Technologies had liabilities of US$9.55m due within 12 months, and liabilities of US$3.00m due beyond 12 months. Offsetting this, it had US$23.1m in cash and US$9.28m in receivables that were due within 12 months. So it actually has US$19.8m more liquid assets than total liabilities.

This excess liquidity suggests that Everspin Technologies is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Everspin Technologies has more cash than debt is arguably a good indication that it can manage its debt safely.

Although Everspin Technologies made a loss at the EBIT level, last year, it was also good to see that it generated US$8.6m in EBIT over the last twelve months. 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 Everspin Technologies'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, a company can only pay off debt with cold hard cash, not accounting profits. Everspin Technologies 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. 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 it is always sensible to investigate a company's debt, in this case Everspin Technologies has US$19.3m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$10m, being 118% of its EBIT. So we don't think Everspin Technologies's use of debt is risky. 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. To that end, you should learn about the 4 warning signs we've spotted with Everspin Technologies (including 1 which makes us a bit uncomfortable) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.