These 4 Measures Indicate That MACOM Technology Solutions Holdings (NASDAQ:MTSI) Is Using Debt Reasonably Well

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies MACOM Technology Solutions Holdings, Inc. (NASDAQ:MTSI) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for MACOM Technology Solutions Holdings

What Is MACOM Technology Solutions Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of January 2025 MACOM Technology Solutions Holdings had US$508.3m of debt, an increase on US$456.7m, over one year. But on the other hand it also has US$656.5m in cash, leading to a US$148.2m net cash position.

How Healthy Is MACOM Technology Solutions Holdings' Balance Sheet?

The latest balance sheet data shows that MACOM Technology Solutions Holdings had liabilities of US$272.4m due within a year, and liabilities of US$420.3m falling due after that. Offsetting these obligations, it had cash of US$656.5m as well as receivables valued at US$91.8m due within 12 months. So it actually has US$55.5m more liquid assets than 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$8.21b 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.

On the other hand, MACOM Technology Solutions Holdings's EBIT dived 14%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. 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. 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 investigate a company's debt, in this case MACOM Technology Solutions Holdings has US$148.2m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 145% of that EBIT to free cash flow, bringing in US$173m. So we don't have any problem with MACOM Technology Solutions Holdings's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for MACOM Technology Solutions Holdings you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.