Here's Why MACOM Technology Solutions Holdings (NASDAQ:MTSI) Can Manage Its Debt Responsibly

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. Importantly, MACOM Technology Solutions Holdings, Inc. (NASDAQ:MTSI) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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.

See our latest analysis for MACOM Technology Solutions Holdings

What Is MACOM Technology Solutions Holdings's Debt?

As you can see below, MACOM Technology Solutions Holdings had US$456.4m of debt at September 2023, down from US$575.5m a year prior. However, its balance sheet shows it holds US$514.5m in cash, so it actually has US$58.1m net cash.

A Look At MACOM Technology Solutions Holdings' Liabilities

We can see from the most recent balance sheet that MACOM Technology Solutions Holdings had liabilities of US$83.5m falling due within a year, and liabilities of US$522.1m due beyond that. Offsetting these obligations, it had cash of US$514.5m as well as receivables valued at US$91.3m due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to MACOM Technology Solutions Holdings' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$6.41b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that MACOM Technology Solutions Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

But the bad news is that MACOM Technology Solutions Holdings has seen its EBIT plunge 13% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While MACOM Technology Solutions Holdings 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. Over the last three years, MACOM Technology Solutions Holdings actually produced more free cash flow than EBIT. 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 MACOM Technology Solutions Holdings has net cash of US$58.1m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$142m, being 128% of its EBIT. So we don't think MACOM Technology Solutions Holdings'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. We've identified 2 warning signs with MACOM Technology Solutions Holdings , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.