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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Micron Technology, Inc. (NASDAQ:MU) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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
How Much Debt Does Micron Technology Carry?
The image below, which you can click on for greater detail, shows that at August 2023 Micron Technology had debt of US$12.0b, up from US$6.02b in one year. On the flip side, it has US$9.59b in cash leading to net debt of about US$2.46b.
How Healthy Is Micron Technology's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Micron Technology had liabilities of US$4.77b due within 12 months and liabilities of US$15.4b due beyond that. Offsetting these obligations, it had cash of US$9.59b as well as receivables valued at US$2.44b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$8.10b.
Of course, Micron Technology has a titanic market capitalization of US$89.9b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 Micron Technology'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.
Over 12 months, Micron Technology made a loss at the EBIT level, and saw its revenue drop to US$16b, which is a fall of 50%. That makes us nervous, to say the least.