Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, MaxLinear, Inc. (NASDAQ:MXL) does carry debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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 MaxLinear's Net Debt?
The chart below, which you can click on for greater detail, shows that MaxLinear had US$122.5m in debt in March 2024; about the same as the year before. However, its balance sheet shows it holds US$191.9m in cash, so it actually has US$69.4m net cash.
How Healthy Is MaxLinear's Balance Sheet?
The latest balance sheet data shows that MaxLinear had liabilities of US$223.9m due within a year, and liabilities of US$168.8m falling due after that. Offsetting this, it had US$191.9m in cash and US$126.2m in receivables that were due within 12 months. So it has liabilities totalling US$74.5m more than its cash and near-term receivables, combined.
Of course, MaxLinear has a market capitalization of US$1.54b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, MaxLinear boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if MaxLinear can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year MaxLinear had a loss before interest and tax, and actually shrunk its revenue by 51%, to US$540m. That makes us nervous, to say the least.
So How Risky Is MaxLinear?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that MaxLinear had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$5.5m of cash and made a loss of US$155m. With only US$69.4m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. For example - MaxLinear has 3 warning signs we think you should be aware of.
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.