In the investment world, David Iben’s statement that “Volatility is not a risk we care about. What matters to us is avoiding permanent loss of capital” holds true. This implies that the smart money understands the importance of assessing a company’s risk based on its debt levels, which are often linked to bankruptcies. One such company is Broadcom Inc. (NASDAQ:AVGO), which utilizes debt as part of its financial strategy. The crucial question then becomes whether this debt makes the company a risky investment.
Debt can be a useful tool for businesses, especially those that require significant capital investments. However, it can become problematic if a company struggles to repay it, leading to potential control by lenders or shareholder dilution to manage debts. When analyzing a company’s debt levels, it is essential to consider both its cash and debt balances.
Broadcom carried a debt of $75.8 billion in February 2024, up from $39.3 billion the previous year. Offsetting this debt, the company had $11.9 billion in cash, resulting in a net debt of approximately $63.9 billion. Examining its balance sheet further revealed liabilities of $20.4 billion due within 12 months and $87.2 billion due beyond that timeframe. Although Broadcom’s publicly traded shares amount to $646.6 billion, the company’s net liabilities exceed its cash and short-term receivables, raising some concern about its financial health.
Assessing the company’s debt relative to its earnings power includes examining its net debt-to-EBITDA ratio and interest coverage ratio. Broadcom’s net debt to EBITDA ratio stood at 3.1, indicating a substantial debt load. While its EBIT successfully covered interest expenses and the net debt to EBITDA ratio was high, the company’s EBIT remained relatively stable over the past year. Generating free cash flow is vital for repaying debts, and Broadcom has demonstrated an ability to convert EBIT into free cash flow.
Overall, Broadcom’s strong cash conversion and prudent debt management are positive indicators. However, the company’s net debt-to-EBITDA ratio raises some concerns. Monitoring its balance sheet strength and future earnings growth will be crucial in maintaining a healthy financial position. Investors should also consider potential risks beyond the balance sheet, as highlighted in the article. For a more in-depth analysis of Broadcom’s valuation and financial health, readers can access the free analysis provided by Simply Wall St.
In conclusion, while debt can pose risks for a company, when managed effectively, it can enhance shareholder returns. By staying informed about a company’s debt levels and overall financial health, investors can make more informed decisions about their investments.
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https://simplywall.st/stocks/us/semiconductors/nasdaq-avgo/broadcom/news/we-think-broadcom-nasdaqavgo-can-stay-on-top-of-its-debt