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.' 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 MaxLinear, Inc. (NASDAQ:MXL) does use debt in its business. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at 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$122.4m in debt in December 2023; about the same as the year before. However, its balance sheet shows it holds US$187.3m in cash, so it actually has US$64.9m net cash.
How Strong Is MaxLinear's Balance Sheet?
We can see from the most recent balance sheet that MaxLinear had liabilities of US$222.1m falling due within a year, and liabilities of US$171.9m due beyond that. Offsetting these obligations, it had cash of US$187.3m as well as receivables valued at US$170.6m due within 12 months. So it has liabilities totalling US$36.1m more than its cash and near-term receivables, combined.
Of course, MaxLinear has a market capitalization of US$1.56b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 it is future earnings, more than anything, that will determine MaxLinear's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year MaxLinear had a loss before interest and tax, and actually shrunk its revenue by 38%, to US$693m. To be frank that doesn't bode well.
So How Risky Is MaxLinear?
Although MaxLinear had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$24m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with MaxLinear , and understanding them should be part of your investment process.
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.
