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 MACOM Technology Solutions Holdings, Inc. (NASDAQ:MTSI) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is MACOM Technology Solutions Holdings's Debt?

The image below, which you can click on for greater detail, shows that MACOM Technology Solutions Holdings had debt of US$456.9m at the end of March 2024, a reduction from US$576.2m over a year. But on the other hand it also has US$476.4m in cash, leading to a US$19.6m net cash position.

How Healthy Is MACOM Technology Solutions Holdings' Balance Sheet?

We can see from the most recent balance sheet that MACOM Technology Solutions Holdings had liabilities of US$108.9m falling due within a year, and liabilities of US$521.9m due beyond that. Offsetting these obligations, it had cash of US$476.4m as well as receivables valued at US$120.2m due within 12 months. So its liabilities total US$34.1m more than the combination of its cash and short-term receivables.

This state of affairs indicates that MACOM Technology Solutions Holdings' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$7.57b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, MACOM Technology Solutions Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact MACOM Technology Solutions Holdings's saving grace is its low debt levels, because its EBIT has tanked 52% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if MACOM Technology Solutions Holdings 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. MACOM Technology Solutions Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, MACOM Technology Solutions Holdings actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that MACOM Technology Solutions Holdings has US$19.6m in net cash. And it impressed us with free cash flow of US$129m, being 123% of its EBIT. So we don't have any problem with MACOM Technology Solutions Holdings's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that MACOM Technology Solutions Holdings is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com