We Think Super Micro Computer (NASDAQ:SMCI) Can Stay On Top Of Its Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Super Micro Computer, Inc. (NASDAQ:SMCI) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 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$290.3m at the end of June 2023, a reduction from US$596.8m over a year. But it also has US$440.6m in cash to offset that, meaning it has US$150.3m net cash.

A Look At Super Micro Computer's Liabilities

The latest balance sheet data shows that Super Micro Computer had liabilities of US$1.37b due within a year, and liabilities of US$327.9m falling due after that. Offsetting this, it had US$440.6m in cash and US$1.18b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$86.0m.

This state of affairs indicates that Super Micro Computer's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$14.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. 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.

Better yet, Super Micro Computer grew its EBIT by 127% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. 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, a company can only pay off debt with cold hard cash, not accounting profits. 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 17% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Super Micro Computer has US$150.3m in net cash. And it impressed us with its EBIT growth of 127% over the last year. So is Super Micro Computer's debt a risk? It doesn't seem so to us. 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. For example - Super Micro Computer has 1 warning sign we think 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.