Super Micro Computer (NASDAQ:SMCI) Has A Pretty Healthy Balance Sheet

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 Super Micro Computer, Inc. (NASDAQ:SMCI) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

See our latest analysis for Super Micro Computer

How Much Debt Does Super Micro Computer Carry?

The image below, which you can click on for greater detail, shows that Super Micro Computer had debt of US$187.2m at the end of March 2023, a reduction from US$547.5m over a year. However, it does have US$362.8m in cash offsetting this, leading to net cash of US$175.6m.

How Healthy Is Super Micro Computer's Balance Sheet?

According to the last reported balance sheet, Super Micro Computer had liabilities of US$1.09b due within 12 months, and liabilities of US$331.7m due beyond 12 months. Offsetting these obligations, it had cash of US$362.8m as well as receivables valued at US$782.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$278.5m.

Of course, Super Micro Computer has a titanic market capitalization of US$11.5b, so these liabilities are probably manageable. 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, Super Micro Computer also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Super Micro Computer grew its EBIT by 235% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Super Micro Computer 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Super Micro Computer 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. In the last three years, Super Micro Computer created free cash flow amounting to 12% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

We could understand if investors are concerned about Super Micro Computer's liabilities, but we can be reassured by the fact it has has net cash of US$175.6m. And it impressed us with its EBIT growth of 235% over the last year. So we don't think Super Micro Computer's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Super Micro Computer that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.