Super Micro Computer (NASDAQ:SMCI) Could Easily Take On More Debt
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.' 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. We note that Super Micro Computer, Inc. (NASDAQ:SMCI) does have debt on its balance sheet. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Super Micro Computer
How Much Debt Does Super Micro Computer Carry?
You can click the graphic below for the historical numbers, but it shows that as of June 2021 Super Micro Computer had US$98.2m of debt, an increase on US$29.4m, over one year. But it also has US$232.3m in cash to offset that, meaning it has US$134.1m net cash.
How Healthy Is Super Micro Computer's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Super Micro Computer had liabilities of US$968.9m due within 12 months and liabilities of US$176.7m due beyond that. On the other hand, it had cash of US$232.3m and US$563.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$349.5m.
Given Super Micro Computer has a market capitalization of US$1.87b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Super Micro Computer also has more cash than debt, so we're pretty confident it can manage its debt safely.
Also positive, Super Micro Computer grew its EBIT by 20% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Super Micro Computer'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, a company can only pay off debt with cold hard cash, not accounting profits. While Super Micro Computer has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Super Micro Computer recorded free cash flow worth 70% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Summing up
While Super Micro Computer does have more liabilities than liquid assets, it also has net cash of US$134.1m. The cherry on top was that in converted 70% of that EBIT to free cash flow, bringing in US$65m. So is Super Micro Computer's debt a risk? It doesn't seem so to us. 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 Super Micro Computer .
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
