MACOM Technology Solutions Holdings (NASDAQ:MTSI) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that MACOM Technology Solutions Holdings, Inc. (NASDAQ:MTSI) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for MACOM Technology Solutions Holdings

How Much Debt Does MACOM Technology Solutions Holdings Carry?

The chart below, which you can click on for greater detail, shows that MACOM Technology Solutions Holdings had US$576.5m in debt in June 2023; about the same as the year before. But it also has US$587.6m in cash to offset that, meaning it has US$11.1m net cash.

How Strong 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$210.6m falling due within a year, and liabilities of US$517.4m due beyond that. Offsetting this, it had US$587.6m in cash and US$105.9m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$34.5m.

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 while it's hard to imagine that the US$5.66b 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.

Fortunately, MACOM Technology Solutions Holdings grew its EBIT by 9.6% in the last year, making that debt load look even more manageable. 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 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. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

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. The cherry on top was that in converted 139% 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. 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. To that end, you should be aware of the 2 warning signs we've spotted with MACOM Technology Solutions Holdings .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.