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 MaxLinear, Inc. (NASDAQ:MXL) does use debt in its business. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for MaxLinear
What Is MaxLinear's Net Debt?
The chart below, which you can click on for greater detail, shows that MaxLinear had US$122.5m in debt in March 2024; about the same as the year before. But it also has US$191.9m in cash to offset that, meaning it has US$69.4m net cash.
How Healthy Is MaxLinear's Balance Sheet?
The latest balance sheet data shows that MaxLinear had liabilities of US$223.9m due within a year, and liabilities of US$168.8m falling due after that. On the other hand, it had cash of US$191.9m and US$126.2m worth of receivables due within a year. So it has liabilities totalling US$74.5m more than its cash and near-term receivables, combined.
Given MaxLinear has a market capitalization of US$1.61b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, MaxLinear also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if MaxLinear 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.
In the last year MaxLinear had a loss before interest and tax, and actually shrunk its revenue by 51%, to US$540m. That makes us nervous, to say the least.
So How Risky Is MaxLinear?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months MaxLinear lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$5.5m of cash and made a loss of US$155m. With only US$69.4m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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 example, we've discovered 3 warning signs for MaxLinear that you should be aware of before investing here.
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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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.
About NasdaqGS:MXL
Excellent balance sheet and good value.
