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.’ It’s only natural to consider a company’s balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Intel Corporation (NASDAQ:INTC) does use debt in its business. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company’s debt levels is to consider its cash and debt together.
What Is Intel’s Debt?
The image below, which you can click on for greater detail, shows that at September 2023 Intel had debt of US$48.9b, up from US$39.5b in one year. However, it also had US$25.0b in cash, and so its net debt is US$23.9b.
A Look At Intel’s Liabilities
The latest balance sheet data shows that Intel had liabilities of US$28.6b due within a year, and liabilities of US$54.5b falling due after that. Offsetting this, it had US$25.0b in cash and US$3.10b in receivables that were due within 12 months. So it has liabilities totalling US$55.0b more than its cash and near-term receivables, combined.
This deficit isn’t so bad because Intel is worth a massive US$198.7b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it’s clear that we should definitely closely examine whether it can manage its debt without dilution. There’s no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Intel can strengthen its balance sheet over time.
Over 12 months, Intel made a loss at the EBIT level, and saw its revenue drop to US$53b, which is a fall of 24%. To be frank that doesn’t bode well.
Caveat Emptor
Not only did Intel’s revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost US$2.1b at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn’t help that it burned through US$10b of cash over the last year. So suffice it to say we consider the stock very risky.