MACOM Technology Solutions Holdings (NASDAQ:MTSI) Has A Rock Solid Balance Sheet

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that MACOM Technology Solutions Holdings, Inc. (NASDAQ:MTSI) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for MACOM Technology Solutions Holdings

How Much Debt Does MACOM Technology Solutions Holdings Carry?

As you can see below, at the end of September 2022, MACOM Technology Solutions Holdings had US$575.5m of debt, up from US$500.8m a year ago. Click the image for more detail. But on the other hand it also has US$586.5m in cash, leading to a US$11.1m net cash position.

How Strong Is MACOM Technology Solutions Holdings' Balance Sheet?

According to the last reported balance sheet, MACOM Technology Solutions Holdings had liabilities of US$97.2m due within 12 months, and liabilities of US$631.9m due beyond 12 months. On the other hand, it had cash of US$586.5m and US$101.6m worth of receivables due within a year. So it has liabilities totalling US$41.0m more than its cash and near-term receivables, combined.

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$4.63b company is struggling for cash, we still think it's worth monitoring its 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.

On top of that, MACOM Technology Solutions Holdings grew its EBIT by 64% over the last twelve months, and that growth will make it easier to handle its debt. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 it is always sensible to look at a company's total liabilities, it is very reassuring that MACOM Technology Solutions Holdings has US$11.1m in net cash. And it impressed us with free cash flow of US$150m, being 199% 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. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with MACOM Technology Solutions Holdings (at least 2 which don't sit too well with us) , and understanding them should be part of your investment process.

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.