Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies MaxLinear, Inc. (NASDAQ:MXL) makes use of debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for MaxLinear
What Is MaxLinear's Debt?
As you can see below, MaxLinear had US$122.1m of debt at June 2023, down from US$246.5m a year prior. But it also has US$245.1m in cash to offset that, meaning it has US$123.0m net cash.
How Strong Is MaxLinear's Balance Sheet?
According to the last reported balance sheet, MaxLinear had liabilities of US$241.7m due within 12 months, and liabilities of US$173.7m due beyond 12 months. Offsetting this, it had US$245.1m in cash and US$157.8m in receivables that were due within 12 months. So its liabilities total US$12.5m more than the combination of its cash and short-term receivables.
This state of affairs indicates that MaxLinear'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$1.76b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, MaxLinear boasts net cash, so it's fair to say it does not have a heavy debt load!
On the other hand, MaxLinear saw its EBIT drop by 7.2% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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 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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. MaxLinear 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. Over the last two years, MaxLinear actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
Summing Up
While it is always sensible to look at a company's total liabilities, it is very reassuring that MaxLinear has US$123.0m in net cash. The cherry on top was that in converted 171% of that EBIT to free cash flow, bringing in US$156m. So is MaxLinear's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 3 warning signs we've spotted with MaxLinear .
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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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.
