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 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 Micron Technology, Inc. (NASDAQ:MU) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. 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. When we think about a company's use of debt, we first look at cash and debt together.
What Is Micron Technology's Net Debt?
As you can see below, Micron Technology had US$6.03b of debt, at June 2022, which is about the same as the year before. You can click the chart for greater detail. But it also has US$10.2b in cash to offset that, meaning it has US$4.19b net cash.
How Strong Is Micron Technology's Balance Sheet?
According to the last reported balance sheet, Micron Technology had liabilities of US$7.01b due within 12 months, and liabilities of US$9.01b due beyond 12 months. Offsetting these obligations, it had cash of US$10.2b as well as receivables valued at US$6.23b due within 12 months. So it can boast US$441.0m more liquid assets than total liabilities.
This state of affairs indicates that Micron Technology's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$55.3b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Micron Technology boasts net cash, so it's fair to say it does not have a heavy debt load!
Better yet, Micron Technology grew its EBIT by 122% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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 Micron Technology 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 company can only pay off debt with cold hard cash, not accounting profits. Micron Technology may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, Micron Technology recorded free cash flow of 30% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
While we empathize with investors who find debt concerning, you should keep in mind that Micron Technology has net cash of US$4.19b, as well as more liquid assets than liabilities. And we liked the look of last year's 122% year-on-year EBIT growth. So is Micron Technology's debt a risk? It doesn't seem so to us. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Micron Technology insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.
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.
What are the risks and opportunities for Micron Technology?
Price-To-Earnings ratio (11.3x) is below the US market (15.1x)
Earnings are forecast to grow 58.78% per year
Significant insider selling over the past 3 months
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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.