Microchip Technology (NASDAQ:MCHP) is a company that carries debt on its balance sheet, and the question is whether this debt makes the company risky. Debt can be a useful tool for businesses, especially those that require significant capital. However, debt becomes dangerous when a company struggles to pay it off, potentially leading to bankruptcy or dilution of shareholders’ equity.
As of June 2023, Microchip Technology had $6.03 billion in debt, down from $7.56 billion the previous year. However, the company also had $271.2 million in cash, resulting in a net debt of $5.76 billion. Looking at the balance sheet, Microchip Technology had liabilities of $3.22 billion due within a year and $6.44 billion due beyond that. Offsetting these obligations, the company had $271.2 million in cash and $1.47 billion in receivables due within 12 months. In total, Microchip Technology had liabilities exceeding its cash and near-term receivables by $7.93 billion.
Despite the company’s significant debt, Microchip Technology has a large market capitalization of $39.3 billion, which suggests it could raise cash if needed to improve its balance sheet. When assessing a company’s debt levels, it is essential to consider its cash and debt together.
Analyzing the company’s debt load relative to its earnings power, Microchip Technology’s net debt is only 1.3 times its EBITDA (earnings before interest, tax, depreciation, and amortization). Additionally, its EBIT (earnings before interest and tax) covers its interest expense 16.9 times over. These figures indicate that the company uses debt conservatively and can manage its debt without dilution.
Furthermore, Microchip Technology experienced a 53% growth in EBIT over the last twelve months, which will make it easier for the company to handle its debt. Future earnings, more than anything, will determine the company’s ability to maintain a healthy balance sheet. It is important to note that a company cannot pay debt with paper profits; it needs actual cash flow. Fortunately, Microchip Technology has generated more free cash flow than EBIT over the last three years, demonstrating strong cash generation.
In conclusion, Microchip Technology’s balance sheet appears healthy despite its debt. The company’s conservative use of debt, high interest coverage, and strong cash generation indicate that it can handle its debt obligations effectively.