Micron Technology (NASDAQ:MU) Is Making Moderate Use Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. Importantly, Micron Technology, Inc. (NASDAQ:MU) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Micron Technology

How Much Debt Does Micron Technology Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Micron Technology had US$11.9b of debt, an increase on US$6.03b, over one year. However, it also had US$10.4b in cash, and so its net debt is US$1.57b.

How Healthy Is Micron Technology's Balance Sheet?

According to the last reported balance sheet, Micron Technology had liabilities of US$5.10b due within 12 months, and liabilities of US$15.2b due beyond 12 months. On the other hand, it had cash of US$10.4b and US$2.43b worth of receivables due within a year. So it has liabilities totalling US$7.49b more than its cash and near-term receivables, combined.

Given Micron Technology has a humongous market capitalization of US$75.4b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Micron Technology's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Micron Technology made a loss at the EBIT level, and saw its revenue drop to US$18b, which is a fall of 44%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Micron Technology's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at US$2.6b. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$4.7b of cash over the last year. So suffice it to say we consider the stock very 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. Case in point: We've spotted 1 warning sign for Micron Technology 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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