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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We note that Rambus Inc. (NASDAQ:RMBS) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Rambus
What Is Rambus's Debt?
The image below, which you can click on for greater detail, shows that at December 2021 Rambus had debt of US$163.7m, up from US$156.0m in one year. However, it does have US$485.6m in cash offsetting this, leading to net cash of US$321.9m.
A Look At Rambus' Liabilities
We can see from the most recent balance sheet that Rambus had liabilities of US$267.3m falling due within a year, and liabilities of US$103.0m due beyond that. Offsetting these obligations, it had cash of US$485.6m as well as receivables valued at US$179.7m due within 12 months. So it actually has US$295.0m more liquid assets than total liabilities.
This surplus suggests that Rambus has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Rambus has more cash than debt is arguably a good indication that it can manage its debt safely.
Although Rambus made a loss at the EBIT level, last year, it was also good to see that it generated US$32m in EBIT over the last twelve months. 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 Rambus'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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Rambus 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. Happily for any shareholders, Rambus actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.