Legendary fund manager Li Lu (who was backed by Charlie Munger) once said, “The biggest investment risk isn’t price volatility, it’s whether you suffer a permanent loss of capital.” So it might be obvious that you need to consider debt, when you think about how risky a particular stock is, because too much debt can send a company into the abyss. We can see that Micron Technology, Inc. (NASDAQ:MU) uses debt in its business. But the real question is whether that debt makes the company risky.
When is debt dangerous?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it’s at their mercy. If things get really bad, lenders can take control of the deal. A more common (but still costly) case, however, is when a company has to issue stock at bargain prices, which permanently dilutes shareholders, just to shore up its balance sheet. Of course, the benefit of leverage is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high returns. When thinking about a company’s use of debt, let’s first consider cash and debt together.
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What is Micron Technology’s net debt?
As you can see below, Micron Technology had $6.03 billion in debt as of June 2022, which is about the same as last year. You can click on the chart to see more details. But it also has $10.2 billion in cash to offset this, meaning it has $4.19 billion in net cash.
How strong is Micron Technology’s balance sheet?
As of its most recently reported balance sheet, Micron Technology had $7.01 billion in debt maturing within 12 months and $9.01 billion in debt maturing after 12 months. Against these obligations, the company had $10.2 billion in cash and $6.23 billion of accounts receivable that were due within 12 months. So it has $441.0 million more in cash than total Liabilities.
This state of affairs suggests that Micron Technology’s balance sheet looks reasonably solid, with total liabilities roughly equaling cash and cash equivalents. So it’s highly unlikely that the $55.3 billion company is cash-strapped, but it’s still worth keeping an eye on the balance sheet. In short, Micron Technology has net cash so it’s fair to say it doesn’t have a heavy debt load!
Better still, Micron Technology grew its EBIT by 122% last year, which is an impressive improvement. This boost will make it even easier to pay off debt in the future. Undoubtedly, we learn most about debt from the balance sheet. But ultimately, the company’s future profitability will determine whether Micron Technology can strengthen its balance sheet over time. So if you focus on the future, you can check this free Analyst earnings forecast report.
After all, a company can only pay off debts with hard cash, not with accounting profits. While Micron Technology has net cash on the balance sheet, it’s still interesting to see how well the company is converting its earnings before interest and taxes (EBIT) into free cash flow, as this will affect both its needs and its ability to manage debt . Looking over the last three years, Micron Technology has reported free cash flow of 30% of its EBIT, which is weaker than expected. This weak cash conversion makes debt management more difficult.
While we sympathize with investors who find debt a concern, consider that Micron Technology has $4.19 billion in net cash and more liquid assets than liabilities. And we liked the sight of last year’s EBIT growth of 122% year over year. So is Micron Technology’s debt a risk? It doesn’t seem like it to us. Of course, we wouldn’t say no to the added confidence we’d gain from knowing that insiders have bought Micron Technology stock: If you’re on the same page, you can find out if insiders are buying by clicking this link.
At the end of the day, it’s often better to focus on companies that are free of net debt. You can access our dedicated list of such companies (all with a track record of earnings growth). It’s free.
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This Simply Wall St article is of a general nature. We provide comments based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your goals or financial situation. Our goal is to offer you long-term focused analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
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