Intel and the Question of Debt: A Risk Analysis Check

The assessment of risks for investors is a complex task. Warren Buffett pointed out that volatility is not synonymous with risk. Nevertheless, it is important to consider a company's indebtedness when evaluating its risk profile. Intel Corporation reports debt on its balance sheet. But should shareholders be concerned about it? Debt becomes problematic when a company has difficulty repaying it, either through raising capital or from its own cash flows. In the worst-case scenario, creditors might take control of the company. More commonly, a company has to dilute shareholder value to reduce debt. On the positive side, many companies use debt to finance growth without negative consequences. A look at Intel’s current balance sheet shows that as of June 2024, the company had debts amounting to $53 billion, compared to $49 billion in the previous year. Offset by cash reserves of $29.3 billion, this results in a net debt of around $23.8 billion. The balance sheet data reveal liabilities totaling $32 billion due within a year and additional liabilities of $53.7 billion due thereafter. These are offset by cash and receivables amounting to $34.58 billion, leading to a net debt of $51.2 billion – a significant sum compared to its market capitalization of $84.1 billion. With a net debt level of around 2.2 times EBITDA, Intel demonstrates moderate debt usage. Additionally, the company impresses with an interest coverage ratio of 1,000, indicating good management of interest expenses. Although Intel recorded a loss at the EBIT level last year, it has managed to turn this around to a positive $509 million in the last twelve months. However, it is not only about recording profits but also about generating free cash flows to reduce debt. Last year, Intel used up a remarkable amount of cash, which increases the risks associated with its debt strategy. Intel’s ability to convert EBIT into free cash flow remains inadequate. Positively, the interest expenses are well-covered. Summarized, Intel’s debt load makes the company high-risk. Some investors may favor this risk factor, but caution is warranted. In conclusion, it might be advantageous to focus on debt-free companies. Such an approach could mitigate risks and create a more stable investment environment. - Intel