Does MACOM Technology Solutions Holdings (NASDAQ:MTSI) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, MACOM Technology Solutions Holdings, Inc. (NASDAQ:MTSI) does carry debt. 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for MACOM Technology Solutions Holdings

What Is MACOM Technology Solutions Holdings's Net Debt?

The chart below, which you can click on for greater detail, shows that MACOM Technology Solutions Holdings had US$575.8m in debt in December 2022; about the same as the year before. However, its balance sheet shows it holds US$594.7m in cash, so it actually has US$18.9m net cash.

How Healthy Is MACOM Technology Solutions Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that MACOM Technology Solutions Holdings had liabilities of US$93.8m due within 12 months and liabilities of US$631.4m due beyond that. Offsetting these obligations, it had cash of US$594.7m as well as receivables valued at US$112.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$18.4m.

Having regard to MACOM Technology Solutions Holdings' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$4.87b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, MACOM Technology Solutions Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that MACOM Technology Solutions Holdings has boosted its EBIT by 50%, thus reducing the spectre of future debt repayments. 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 MACOM Technology Solutions Holdings'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. MACOM Technology Solutions Holdings 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, MACOM Technology Solutions Holdings actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that MACOM Technology Solutions Holdings has US$18.9m in net cash. The cherry on top was that in converted 162% of that EBIT to free cash flow, bringing in US$150m. So we don't think MACOM Technology Solutions Holdings's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with MACOM Technology Solutions Holdings .

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.