Everspin Technologies (NASDAQ:MRAM) Seems To Use Debt Quite Sensibly
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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Everspin Technologies, Inc. (NASDAQ:MRAM) does carry debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Everspin Technologies
What Is Everspin Technologies's Debt?
As you can see below, Everspin Technologies had US$5.46m of debt at September 2021, down from US$7.90m a year prior. However, it does have US$14.6m in cash offsetting this, leading to net cash of US$9.09m.
How Healthy Is Everspin Technologies' Balance Sheet?
The latest balance sheet data shows that Everspin Technologies had liabilities of US$11.0m due within a year, and liabilities of US$2.60m falling due after that. On the other hand, it had cash of US$14.6m and US$10.6m worth of receivables due within a year. So it can boast US$11.6m more liquid assets than total liabilities.
This short term liquidity is a sign that Everspin Technologies could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Everspin Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!
Notably, Everspin Technologies made a loss at the EBIT level, last year, but improved that to positive EBIT of US$64k in 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 Everspin Technologies's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Everspin Technologies 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. Over the last year, Everspin Technologies actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that Everspin Technologies has net cash of US$9.09m, as well as more liquid assets than liabilities. The cherry on top was that in converted 4,627% of that EBIT to free cash flow, bringing in US$3.0m. So we are not troubled with Everspin Technologies's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Everspin Technologies has 3 warning signs we think you should be aware of.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology 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 account of your objectives, 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 stocks mentioned.
