We Think MACOM Technology Solutions Holdings (NASDAQ:MTSI) Can Manage Its Debt With Ease

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 can see that MACOM Technology Solutions Holdings, Inc. (NASDAQ:MTSI) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Debt?

The chart below, which you can click on for greater detail, shows that MACOM Technology Solutions Holdings had US$576.2m in debt in March 2023; about the same as the year before. However, it does have US$577.3m in cash offsetting this, leading to net cash of US$1.13m.

How Healthy Is MACOM Technology Solutions Holdings' Balance Sheet?

According to the last reported balance sheet, MACOM Technology Solutions Holdings had liabilities of US$91.2m due within 12 months, and liabilities of US$632.2m due beyond 12 months. Offsetting this, it had US$577.3m in cash and US$121.8m in receivables that were due within 12 months. So it has liabilities totalling US$24.3m more than its cash and near-term receivables, combined.

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$4.39b 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 addition to that, we're happy to report that MACOM Technology Solutions Holdings has boosted its EBIT by 35%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. 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. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

We could understand if investors are concerned about MACOM Technology Solutions Holdings's liabilities, but we can be reassured by the fact it has has net cash of US$1.13m. The cherry on top was that in converted 143% of that EBIT to free cash flow, bringing in US$141m. 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. For instance, we've identified 2 warning signs 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.