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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Micron Technology, Inc. (NASDAQ:MU) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Micron Technology
What Is Micron Technology's Net Debt?
As you can see below, at the end of August 2023, Micron Technology had US$12.0b of debt, up from US$6.02b a year ago. Click the image for more detail. However, it also had US$9.59b in cash, and so its net debt is US$2.46b.
How Strong Is Micron Technology's Balance Sheet?
According to the last reported balance sheet, Micron Technology had liabilities of US$4.77b due within 12 months, and liabilities of US$15.4b due beyond 12 months. Offsetting this, it had US$9.59b in cash and US$2.44b in receivables that were due within 12 months. So its liabilities total US$8.10b more than the combination of its cash and short-term receivables.
Given Micron Technology has a humongous market capitalization of US$76.0b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Micron Technology can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Micron Technology had a loss before interest and tax, and actually shrunk its revenue by 50%, to US$16b. That makes us nervous, to say the least.
Caveat Emptor
While Micron Technology's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at US$5.5b. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$6.1b of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Micron Technology .