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, Everspin Technologies, Inc. (NASDAQ:MRAM) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Everspin Technologies Carry?
As you can see below, Everspin Technologies had US$3.76m of debt at June 2022, down from US$6.96m a year prior. However, its balance sheet shows it holds US$23.1m in cash, so it actually has US$19.3m net cash.
How Healthy Is Everspin Technologies' Balance Sheet?
According to the last reported balance sheet, Everspin Technologies had liabilities of US$9.55m due within 12 months, and liabilities of US$3.00m due beyond 12 months. Offsetting these obligations, it had cash of US$23.1m as well as receivables valued at US$9.28m due within 12 months. So it actually has US$19.8m more liquid assets than total liabilities.
It's good to see that Everspin Technologies has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Everspin Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!
It was also good to see that despite losing money on the EBIT line last year, Everspin Technologies turned things around in the last 12 months, delivering and EBIT of US$8.6m. 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 Everspin Technologies's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Everspin Technologies 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 year, Everspin Technologies actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Everspin Technologies has net cash of US$19.3m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$10m, being 118% of its EBIT. So is Everspin Technologies's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for Everspin Technologies (2 can't be ignored!) that you should be aware of before investing here.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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