Rambus (NASDAQ:RMBS) has a rock-solid balance sheet

David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Above all, rambus inc. (NASDAQ:RMBS) is in debt. But should shareholders worry about its use of debt?

Why is debt risky?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first step when considering a company’s debt levels is to consider its cash and debt together.

See our latest analysis for Rambus

What is Rambus’ net debt?

As you can see below, Rambus had $49.2 million in debt as of June 2022, up from $159.8 million the previous year. But he also has $351.6 million in cash to offset that, which means he has a net cash of $302.4 million.

NasdaqGS: History of RMBS Debt to Equity August 27, 2022

How strong is Rambus’ balance sheet?

We can see from the most recent balance sheet that Rambus had liabilities of US$161.4 million due in one year, and liabilities of US$111.3 million beyond. In return, he had $351.6 million in cash and $210.3 million in receivables due within 12 months. So he actually has US$289.2 million After liquid assets than total liabilities.

This surplus suggests that Rambus has a conservative balance sheet, and could probably eliminate its debt without too much difficulty. In short, Rambus has clean cash, so it’s fair to say that it doesn’t have a lot of debt!

It was also good to see that despite losing money on the EBIT line last year, Rambus turned the tide over the past 12 months, delivering an EBIT of $62 million. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future earnings, more than anything, that will determine Rambus’ ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. Although Rambus has net cash on its balance sheet, it’s always worth looking at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how fast it’s building (or erodes) this cash balance. . Over the past year, Rambus has actually produced more free cash flow than EBIT. This kind of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summary

While it’s always a good idea to investigate a company’s debt, in this case Rambus has $302.4 million in net cash and a decent balance sheet. And it impressed us with free cash flow of $199 million, or 322% of its EBIT. So is Rambus debt a risk? This does not seem to us to be the case. Although Rambus didn’t make a statutory profit last year, its positive EBIT suggests profitability may not be far off. Click here to see if its earnings are heading in the right direction, in the medium term.

In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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