Warren Buffett said: “Volatility is far from synonymous with risk”. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. We can see that Marvell Technology, Inc. (NASDAQ: MRVL) uses debt in its business. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we look at debt levels, we first consider both cash and debt levels.
Check out our latest analysis for Marvell Technology
What is Marvell Technology’s net debt?
You can click on the graph below for historical figures, but it shows that as of May 2021, Marvell Technology had a debt of US $ 4.90 billion, an increase from US $ 1.44 billion. , over one year. On the other hand, it has $ 572.6 million in cash, resulting in net debt of around $ 4.33 billion.
How strong is Marvell Technology’s balance sheet?
We can see from the most recent balance sheet that Marvell Technology had liabilities of US $ 1.16 billion due within one year and liabilities of US $ 5.21 billion due beyond. . In return, he had $ 572.6 million in cash and $ 694.4 million in receivables due within 12 months. It therefore has liabilities totaling US $ 5.11 billion more than its cash and short-term receivables combined.
Considering that Marvell Technology has a whopping market capitalization of US $ 42.7 billion, it’s hard to believe that these liabilities pose a significant threat. Having said that, it is clear that we must continue to monitor his record lest it get worse.
We measure a company’s debt load relative to its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT) covers its interest costs (interest coverage). Thus, we consider debt versus earnings with and without amortization charges.
Marvell Technology shareholders face the double whammy of a high net debt / EBITDA ratio (5.9) and fairly low interest coverage, since EBIT is only 0.82 times expenses of interest. The debt burden here is considerable. However, the bright side is that Marvell Technology has achieved positive EBIT of US $ 70 million over the past twelve months, an improvement over the loss of the previous year. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Marvell Technology can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Finally, a business can only pay off its debts with hard cash, not with book profits. It is therefore worth checking to what extent earnings before interest and taxes (EBIT) are backed by free cash flow. Fortunately for all shareholders, Marvell Technology has actually generated more free cash flow than EBIT over the past year. There is nothing better than cash flow to stay in the good graces of your lenders.
Our point of view
We were not impressed with Marvell Technology’s net debt on EBITDA, and its interest coverage made us cautious. But like a ballerina finishing on a perfect spin, she has no trouble converting her EBIT into free cash flow. When we consider all of the factors mentioned above, we feel a little cautious about Marvell Technology’s use of debt. While we understand that debt can improve returns on equity, we suggest shareholders watch their debt level closely, lest they increase. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we have identified 1 warning sign for Marvell Technology that you need to be aware of.
If you are interested in investing in companies that can generate profits without the burden of debt, check out this page. free list of growing companies that have net cash on the balance sheet.
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