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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that MACOM Technology Solutions Holdings, Inc. (NASDAQ:MTSI) does have debt on its balance sheet. 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. 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 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

How Much Debt Does MACOM Technology Solutions Holdings Carry?

As you can see below, MACOM Technology Solutions Holdings had US$457.1m of debt at June 2024, down from US$576.5m a year prior. But on the other hand it also has US$521.5m in cash, leading to a US$64.4m net cash position.

How Healthy Is MACOM Technology Solutions Holdings' Balance Sheet?

We can see from the most recent balance sheet that MACOM Technology Solutions Holdings had liabilities of US$103.1m falling due within a year, and liabilities of US$521.1m due beyond that. Offsetting these obligations, it had cash of US$521.5m as well as receivables valued at US$106.8m due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that MACOM Technology Solutions Holdings' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$8.80b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, MACOM Technology Solutions Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact MACOM Technology Solutions Holdings's saving grace is its low debt levels, because its EBIT has tanked 45% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if MACOM Technology Solutions Holdings 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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$64.4m, as well as more liquid assets than liabilities. The cherry on top was that in converted 125% of that EBIT to free cash flow, bringing in US$128m. So we are not troubled with MACOM Technology Solutions Holdings's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for MACOM Technology Solutions Holdings that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.