We Think MACOM Technology Solutions Holdings (NASDAQ:MTSI) Can Manage Its Debt With Ease

In simple terms, Howard Marks makes a valid point about the true risk in investing. Share price fluctuations should not be your main concern; instead, you should focus on the potential for permanent loss. This concern is shared by every experienced investor. It should seem obvious that when determining the riskiness of a particular stock, one must take into account the amount of debt the company carries. Excessive debt can be detrimental to a company's success. In the case of MACOM Technology Solutions Holdings, Inc. (NASDAQ:MTSI), it is evident that they utilize debt in their business operations. The question we must ask ourselves is whether or not this debt should be a cause for concern among shareholders.

The Risk Of Debt: Explained

When a business is unable to meet its financial obligations, such as debt and other liabilities, it becomes risky. This can happen if the business doesn't have enough available cash flow or if it cannot raise capital at a favorable price. In extreme cases, the lenders may take over control of the business. However, a more common (yet still costly) situation is when a company is forced to issue additional shares at a low price in order to manage its debts. It's important to note that debt can be a useful tool for certain types of businesses, particularly those that require significant capital. To determine how much debt a business should take on, it is essential to examine its cash position and debt levels together.

Take a look at our most recent examination of MACOM Technology Solutions Holdings.

The illustration underneath, which can be enlarged by clicking on it, reveals that MACOM Technology Solutions Holdings possessed a debt of US$576.2m in March 2023, which is approximately equivalent to the previous year. Nevertheless, it also possesses US$577.3m in cash to balance this out, resulting in a net cash of US$1.13m.

Is MACOM Tech's Balance Sheet Healthy?

Based on the latest balance sheet, MACOM Technology Solutions Holdings had debts of US$91.2m to be settled within a year, and debts of US$632.2m to be paid beyond a year. On the other hand, it possessed US$577.3m in cash and US$121.8m in receivables that needed to be collected within a year. Consequently, its total obligations exceeded its available cash and short-term receivables by US$24.3m.

This situation suggests that the balance sheet of MACOM Technology Solutions Holdings appears to be quite strong, as the amount it owes is nearly the same as its readily available assets. Thus, even though it is unlikely that the company, valued at US$4.39 billion, is facing financial difficulties, it would still be prudent to keep an eye on its financial position. Despite having some noteworthy liabilities, MACOM Technology Solutions Holdings also possesses a greater amount of cash compared to its debt, indicating that it can likely handle its obligations without any major issues.

Furthermore, we're pleased to announce that MACOM Technology Solutions Holdings has increased its EBIT by 35%, consequently mitigating the potential burden of forthcoming debt payments. It is unquestionable that we gain the most insights about debt from examining the balance sheet. However, the long-term fortification of MACOM Technology Solutions Holdings' balance sheet will ultimately be determined by the future profitability of the company. Therefore, if your attention is geared towards the future, we encourage you to peruse this complimentary report that presents analyst predictions regarding profits.

In order for a company to repay its debt, it needs to have available cash that is not tied up in other financial obligations. Simply relying on accounting profits is not sufficient. Despite having a positive net cash amount on its financial records, it is important to assess MACOM Technology Solutions Holdings' ability to convert its earnings before interest and tax (EBIT) into free cash flow. This analysis helps us understand how quickly the company is either accumulating or depleting its cash reserves. Fortunately, MACOM Technology Solutions Holdings has actually generated more free cash flow than its EBIT in the past three years. This is excellent news for shareholders, as having an influx of cash is crucial for maintaining positive relationships with lenders.

Investors might have concerns about MACOM Technology Solutions Holdings' debts, but they can find reassurance in the fact that the company has a net cash balance of $1.13 million. Additionally, they converted 143% of their earnings before interest and taxes (EBIT) into free cash flow, resulting in $141 million. Therefore, we don't believe that MACOM Technology Solutions Holdings' use of debt poses a significant risk. It's important to focus on the company's balance sheet when analyzing its debts. However, it's worth noting that not all investment risks are solely related to the balance sheet. In the case of MACOM Technology Solutions Holdings, we have identified two warning signs that investors should be aware of.

When the day comes to an end, it is usually more advantageous to direct your attention towards businesses that do not have any outstanding debts. You have the opportunity to explore our exclusive compilation of these companies, all of which have demonstrated a consistent pattern of increasing profits. The best part is, it won't cost you a penny.

What possible dangers and advantages lie ahead for MACOM Technology Solutions Holdings?

MACOM Technology Solutions Holdings, Inc., along with its affiliated companies, creates and produces analog semiconductor solutions for wireless and wired applications in the United States, China, Taiwan, Japan, Singapore, Thailand, South Korea, Australia, Malaysia, and worldwide.

The US market has a Price-To-Earnings ratio of 15.4x, while the Price-To-Earnings ratio in question is 13.4x, indicating that it is lower than the US market.

Profits increased by 63.1% in the previous year.

Profits are expected to decrease by an average of 54.6% annually over the next three years.

Significant amount of earnings not in the form of cash

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The content of this blog post by Simply Wall St is of a more broad and general nature. We offer our opinions based on past information and predictions made by analysts, utilizing a fair and impartial approach. Our articles are not meant to serve as financial guidance. They should not be interpreted as a suggestion to purchase or sell any stocks, nor do they consider your personal goals or financial standing. Our goal is to provide you with in-depth analysis that focuses on long-term performance using fundamental data. It's important to note that our analysis may not take into account the most up-to-date company announcements or qualitative information that may impact stock prices. As a company, Simply Wall St does not hold any positions in the stocks mentioned.