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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Lattice Semiconductor Corporation (NASDAQ:LSCC) does carry debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Lattice Semiconductor's Net Debt?
As you can see below, Lattice Semiconductor had US$170.8m of debt at April 2021, down from US$192.3m a year prior. However, it does have US$185.3m in cash offsetting this, leading to net cash of US$14.5m.
A Look At Lattice Semiconductor's Liabilities
Zooming in on the latest balance sheet data, we can see that Lattice Semiconductor had liabilities of US$80.7m due within 12 months and liabilities of US$215.3m due beyond that. Offsetting this, it had US$185.3m in cash and US$77.0m in receivables that were due within 12 months. So it has liabilities totalling US$33.8m more than its cash and near-term receivables, combined.
This state of affairs indicates that Lattice Semiconductor's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$7.26b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Lattice Semiconductor also has more cash than debt, so we're pretty confident it can manage its debt safely.
And we also note warmly that Lattice Semiconductor grew its EBIT by 10% last year, making its debt load easier to handle. 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 Lattice Semiconductor 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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Lattice Semiconductor 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. Over the last three years, Lattice Semiconductor actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
While it is always sensible to look at a company's total liabilities, it is very reassuring that Lattice Semiconductor has US$14.5m in net cash. The cherry on top was that in converted 136% of that EBIT to free cash flow, bringing in US$81m. So is Lattice Semiconductor's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 3 warning signs we've spotted with Lattice Semiconductor .
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.
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