Rambus (NASDAQ:RMBS) Has A Rock Solid Balance Sheet

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 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 Rambus Inc. (NASDAQ:RMBS) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Rambus

What Is Rambus's Debt?

The image below, which you can click on for greater detail, shows that Rambus had debt of US$10.4m at the end of December 2022, a reduction from US$163.7m over a year. However, its balance sheet shows it holds US$313.2m in cash, so it actually has US$302.8m net cash.

How Strong Is Rambus' Balance Sheet?

The latest balance sheet data shows that Rambus had liabilities of US$126.7m due within a year, and liabilities of US$106.6m falling due after that. Offsetting these obligations, it had cash of US$313.2m as well as receivables valued at US$181.1m due within 12 months. So it actually has US$261.0m more liquid assets than total liabilities.

This surplus suggests that Rambus has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Rambus boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Rambus grew its EBIT by 153% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Rambus's ability to maintain a healthy balance sheet going forward. 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. While Rambus has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Rambus actually produced more free cash flow than EBIT over the last two years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Rambus has net cash of US$302.8m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$210m, being 357% of its EBIT. So we don't think Rambus's use of debt is risky. 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. For example, we've discovered 1 warning sign for Rambus that you should be aware of before investing here.

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.