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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Marvell Technology, Inc. (NASDAQ:MRVL) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Marvell Technology's Debt?
As you can see below, Marvell Technology had US$4.17b of debt at February 2024, down from US$4.49b a year prior. However, because it has a cash reserve of US$950.8m, its net debt is less, at about US$3.22b.
How Healthy Is Marvell Technology's Balance Sheet?
According to the last reported balance sheet, Marvell Technology had liabilities of US$1.81b due within 12 months, and liabilities of US$4.58b due beyond 12 months. Offsetting this, it had US$950.8m in cash and US$1.12b in receivables that were due within 12 months. So its liabilities total US$4.32b more than the combination of its cash and short-term receivables.
Given Marvell Technology has a humongous market capitalization of US$64.5b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Marvell Technology'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.
Over 12 months, Marvell Technology made a loss at the EBIT level, and saw its revenue drop to US$5.5b, which is a fall of 6.8%. We would much prefer see growth.
Caveat Emptor
Importantly, Marvell Technology had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$437m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of US$933m into a profit. So to be blunt we do think it 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. To that end, you should be aware of the 1 warning sign we've spotted with Marvell Technology .
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.