Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, MaxLinear, Inc. (NASDAQ:MXL) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is MaxLinear's Debt?

The chart below, which you can click on for greater detail, shows that MaxLinear had US$122.7m in debt in June 2024; about the same as the year before. But it also has US$185.1m in cash to offset that, meaning it has US$62.4m net cash.

How Strong Is MaxLinear's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that MaxLinear had liabilities of US$190.3m due within 12 months and liabilities of US$165.7m due beyond that. Offsetting this, it had US$185.1m in cash and US$86.4m in receivables that were due within 12 months. So it has liabilities totalling US$84.4m more than its cash and near-term receivables, combined.

Of course, MaxLinear has a market capitalization of US$1.02b, 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. Despite its noteworthy liabilities, MaxLinear boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if MaxLinear 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.

Over 12 months, MaxLinear made a loss at the EBIT level, and saw its revenue drop to US$448m, which is a fall of 56%. That makes us nervous, to say the least.

So How Risky Is MaxLinear?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months MaxLinear lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$35m of cash and made a loss of US$190m. Given it only has net cash of US$62.4m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. Be aware that MaxLinear is showing 2 warning signs in our investment analysis , you should know about...

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.