Here's Why Micron Technology (NASDAQ:MU) Can Manage Its Debt Responsibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Micron Technology, Inc. (NASDAQ:MU) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. 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.

View our latest analysis for Micron Technology

What Is Micron Technology's Debt?

The image below, which you can click on for greater detail, shows that at December 2022 Micron Technology had debt of US$9.35b, up from US$6.10b in one year. But it also has US$10.6b in cash to offset that, meaning it has US$1.23b net cash.

How Strong Is Micron Technology's Balance Sheet?

The latest balance sheet data shows that Micron Technology had liabilities of US$6.53b due within a year, and liabilities of US$12.0b falling due after that. On the other hand, it had cash of US$10.6b and US$3.32b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$4.67b.

Given Micron Technology has a humongous market capitalization of US$54.8b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Micron Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Micron Technology's load is not too heavy, because its EBIT was down 20% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 22% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Micron Technology has US$1.23b in net cash. So we don't have any problem with Micron Technology's use of debt. 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.

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.