Howard Marks put it well when he said that, rather than worrying about share price volatility, ‘The possibility of permanent loss is the risk I worry about… and every practical investor I know. know worried.’ So it seems that the smart money knows that debt – which is often associated with bankruptcy – is an important factor, when you evaluate how risky a company is. Like many other companies Marvell Technology, Inc. (NASDAQ:MRVL) used debt. But should shareholders be concerned about its use of debt?
When is Debt a Problem?
In general, debt can be a real problem if a company cannot pay it off quickly, either by raising capital or with its own cash flow. If things go bad, lenders can take control of the business. However, a more common (but still expensive) situation is where a company needs to dilute shareholders at a cheap share price just to control debt. Of course, many companies use debt to finance growth, without negative consequences. The first thing to do when considering how much debt a business uses is to look at cash and debt together.
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What is Marvell Technology’s Debt?
The chart below, which you can click on for more details, shows that Marvell Technology has US$4.51b in debt as of October 2022; almost the same as last year. However, since it has a cash reserve of US$723.4m, its net debt is low, at about US$3.79b.
How Strong Is Marvell Technology’s Balance Sheet?
We can see from the latest balance sheet that Marvell Technology has liabilities of US$2.42b falling within one year, and liabilities of US$4.54b as a result. To offset this, it has US$723.4m in cash and US$1.39b in receivables due over the 12 months. So it has liabilities worth US$4.85b more than its cash and near-term receipts, combined.
Given that Marvell Technology has a huge market capitalization of US$38.0b, it is hard to believe that these liabilities pose a significant threat. However, we think it’s worth keeping an eye on its balance strength, as it can change over time.
We measure a company’s net debt relative to its earning power by looking at net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and by calculating whether how quickly it earns before interest and taxes (EBIT) covers its interest. expenses (cover interest). The advantage of this method is that we take into account the absolute value of the debt (with net debt to EBITDA) and the actual interest expenses related to that debt (with its interest cover ratio).
Marvell Technology has net debt worth 2.1 times EBITDA, which isn’t too much, but its interest coverage is relatively low, with EBIT at 2.6 times interest expense. It seems that the business has a lot of depreciation and amortization charges, so maybe its debt load is heavier than it first appears, because EBITDA can be a generous measure of income. We also note that Marvell Technology improved its EBIT from last year’s loss to a positive US$397m. The balance sheet is the obvious area to focus on when you’re analyzing debt. But ultimately the future profitability of the business will decide whether Marvell Technology can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Ultimately, a company can only pay off debt with cold hard cash, not accounting income. So it’s worth checking how much earnings before interest and taxes (EBIT) is supported by free cash flow. Last year, Marvell Technology actually generated more free cash flow than EBIT. That kind of quick cash conversion gets us excited like the crowd when the beat drops at a Daft Punk concert.
Our Perspective
The good news is that Marvell Technology’s demonstrated ability to convert EBIT into free cash flow makes us as happy as a fluffy puppy to a small child. But the real truth is that we are concerned about the cover of its interest. All these things considered, it appears that Marvell Technology can comfortably manage its current level of debt. Of course, while this leverage can improve equity returns, it carries more risk, so it’s worth keeping an eye on. Of course, we won’t say no to the extra confidence we’ll gain if we know Marvell Technology insiders are buying shares: if you’re on the same wavelength, you’ll know when insiders are buying by clicking here’s a link.
Of course, if you are the type of investor who prefers to buy stocks without the burden of debt, then do not hesitate to discover our exclusive list of net cash growth stocks, today.
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Find out whether Marvell Technology may be overvalued or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and caveats, dividends, insider transactions and financial health.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased approach 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 into account your goals, 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 of the stocks mentioned.