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.' 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 Marvell Technology, Inc. (NASDAQ:MRVL) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Marvell Technology Carry?

You can click the graphic below for the historical numbers, but it shows that Marvell Technology had US$4.15b of debt in May 2024, down from US$4.67b, one year before. However, it also had US$847.7m in cash, and so its net debt is US$3.30b.

How Strong Is Marvell Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Marvell Technology had liabilities of US$1.47b due within 12 months and liabilities of US$4.54b due beyond that. Offsetting these obligations, it had cash of US$847.7m as well as receivables valued at US$881.9m due within 12 months. So its liabilities total US$4.28b more than the combination of its cash and short-term receivables.

Of course, Marvell Technology has a titanic market capitalization of US$62.2b, 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. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Marvell Technology had a loss before interest and tax, and actually shrunk its revenue by 7.6%, to US$5.3b. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Marvell Technology produced an earnings before interest and tax (EBIT) loss. Indeed, it lost US$462m 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$980m into a profit. So we do think this stock is quite risky. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Marvell Technology insider transactions.

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.