- Oops!Something went wrong.Please try again later.
David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Silicon Laboratories Inc. (NASDAQ:SLAB) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Silicon Laboratories Carry?
The image below, which you can click on for greater detail, shows that at October 2020 Silicon Laboratories had debt of US$543.8m, up from US$364.8m in one year. However, it does have US$721.8m in cash offsetting this, leading to net cash of US$178.0m.
How Strong Is Silicon Laboratories's Balance Sheet?
According to the last reported balance sheet, Silicon Laboratories had liabilities of US$151.1m due within 12 months, and liabilities of US$621.9m due beyond 12 months. On the other hand, it had cash of US$721.8m and US$80.5m worth of receivables due within a year. So it actually has US$29.2m more liquid assets than total liabilities.
This state of affairs indicates that Silicon Laboratories's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$5.23b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Silicon Laboratories boasts net cash, so it's fair to say it does not have a heavy debt load!
Importantly, Silicon Laboratories's EBIT fell a jaw-dropping 42% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Silicon Laboratories can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Silicon Laboratories has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Silicon Laboratories actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
While it is always sensible to investigate a company's debt, in this case Silicon Laboratories has US$178.0m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 234% of that EBIT to free cash flow, bringing in US$140m. So we are not troubled with Silicon Laboratories's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Silicon Laboratories (at least 1 which is significant) , and understanding them should be part of your investment process.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email firstname.lastname@example.org.