MACOM Technology Solutions Holdings (NASDAQ:MTSI) Seems To Use Debt Quite Sensibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for MACOM Technology Solutions Holdings

What Is MACOM Technology Solutions Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that MACOM Technology Solutions Holdings had debt of US$456.7m at the end of December 2023, a reduction from US$575.8m over a year. But it also has US$463.3m in cash to offset that, meaning it has US$6.64m net cash.

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$102.9m falling due within a year, and liabilities of US$523.8m due beyond that. Offsetting this, it had US$463.3m in cash and US$101.1m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$62.3m.

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$7.33b 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.

In fact MACOM Technology Solutions Holdings's saving grace is its low debt levels, because its EBIT has tanked 34% 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. There's no doubt that we learn most about debt from the balance sheet. 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 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. 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 conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

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$6.64m in net cash. The cherry on top was that in converted 125% of that EBIT to free cash flow, bringing in US$142m. So we don't have any problem with MACOM Technology Solutions Holdings's use of debt. 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. Be aware that MACOM Technology Solutions Holdings is showing 1 warning sign in our investment analysis , you should know about...

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.