Micron’s volatile stock
Previously in this series, we looked at some key profitability ratios of Micron Technology (MU), which are useful in helping investors understand the potential returns on their investments in the company. But Micron is a volatile stock, because its profits are largely affected by the average selling price of DRAM, as well as by the success of major technology innovations by competitors like Samsung Electronics (SSNLF).
Now let’s look at other key ratios that determine the company’s financial stability. The financial stability of a company is generally determined by understanding its debt level and its capability to meet its long-term and short-term debt obligations.
This ratio determines whether a company has sufficient current assets to meet its immediate and short-term liabilities. In the past five years, Micron has kept its current ratio above two, which indicates that it has sufficient assets to meet its immediate and short-term liabilities. Otherwise put, Micron has suitable funds to run its operations in the short-term.
By contrast, SanDisk’s (SNDK) current ratio fell from 3.78 in fiscal 2013 to 1.92 in fiscal 2014 because the acquisition of Fusion-io in 2014 reduced its cash reserves.
A company’s DE (debt-to-equity) ratio determines its capital structure and the cost of its capital. As the above table shows, Micron has increased its DE ratio over the past five years to 0.46 in fiscal 2014. This level is below the industry average, indicating that the company is managing its debts properly. The company has been using the cash generated from operations to repurchase existing debt.
By comparison, Micron’s joint venture partner Intel Corporation (INTC) had a DE ratio of 0.22 in fiscal 2014. Semiconductor companies generally maintain low debt due to the volatile nature of their earnings.
You can gain exposure in Micron Technology by investing in the PowerShares QQQ Trust, Series 1 (QQQ), which has 0.34% exposure in the company.