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 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. As with many other companies MaxLinear, Inc. (NYSE:MXL) makes use of debt. But is this debt a concern to shareholders?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.
See our latest analysis for MaxLinear
What Is MaxLinear's Debt?
You can click the graphic below for the historical numbers, but it shows that MaxLinear had US$206.9m of debt in December 2019, down from US$255.8m, one year before. On the flip side, it has US$92.7m in cash leading to net debt of about US$114.2m.
How Healthy Is MaxLinear's Balance Sheet?
According to the last reported balance sheet, MaxLinear had liabilities of US$66.6m due within 12 months, and liabilities of US$224.3m due beyond 12 months. Offsetting this, it had US$92.7m in cash and US$50.4m in receivables that were due within 12 months. So it has liabilities totalling US$147.8m more than its cash and near-term receivables, combined.
Since publicly traded MaxLinear shares are worth a total of US$1.04b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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 MaxLinear'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.
In the last year MaxLinear had negative earnings before interest and tax, and actually shrunk its revenue by 18%, to US$317m. We would much prefer see growth.
Caveat Emptor
Not only did MaxLinear'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$19m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of US$20m. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for MaxLinear 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.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.
About NasdaqGS:MXL
MaxLinear
Provides communications systems-on-chip solutions in the United States, Asia, Europe, and internationally.
Excellent balance sheet and good value.
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