David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 note that Maxim Integrated Products, Inc. (NASDAQ:MXIM) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Maxim Integrated Products's Debt?
The chart below, which you can click on for greater detail, shows that Maxim Integrated Products had US$994.7m in debt in December 2020; about the same as the year before. However, its balance sheet shows it holds US$1.81b in cash, so it actually has US$811.1m net cash.
How Strong Is Maxim Integrated Products' Balance Sheet?
The latest balance sheet data shows that Maxim Integrated Products had liabilities of US$456.4m due within a year, and liabilities of US$1.50b falling due after that. Offsetting these obligations, it had cash of US$1.81b as well as receivables valued at US$485.8m due within 12 months. So it can boast US$334.8m more liquid assets than total liabilities.
This state of affairs indicates that Maxim Integrated Products' 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$25.6b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Maxim Integrated Products boasts net cash, so it's fair to say it does not have a heavy debt load!
And we also note warmly that Maxim Integrated Products grew its EBIT by 19% last year, making its debt load easier to handle. 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 Maxim Integrated Products can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Maxim Integrated Products 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. During the last three years, Maxim Integrated Products generated free cash flow amounting to a very robust 95% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.
While we empathize with investors who find debt concerning, you should keep in mind that Maxim Integrated Products has net cash of US$811.1m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$733m, being 95% of its EBIT. So we don't think Maxim Integrated Products's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Maxim Integrated Products that you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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