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Is Silicon Laboratories (NASDAQ:SLAB) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Silicon Laboratories Inc. (NASDAQ:SLAB) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Silicon Laboratories

How Much Debt Does Silicon Laboratories Carry?

The chart below, which you can click on for greater detail, shows that Silicon Laboratories had US$361.4m in debt in June 2019; about the same as the year before. However, its balance sheet shows it holds US$641.8m in cash, so it actually has US$280.4m net cash.

NasdaqGS:SLAB Historical Debt, September 23rd 2019
NasdaqGS:SLAB Historical Debt, September 23rd 2019

How Healthy Is Silicon Laboratories's Balance Sheet?

According to the last reported balance sheet, Silicon Laboratories had liabilities of US$131.0m due within 12 months, and liabilities of US$420.6m due beyond 12 months. Offsetting these obligations, it had cash of US$641.8m as well as receivables valued at US$72.3m due within 12 months. So it actually has US$162.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Silicon Laboratories could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Silicon Laboratories boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Silicon Laboratories's EBIT dived 20%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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 Silicon Laboratories can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Silicon Laboratories has net cash of US$280.4m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$172m, being 188% of its EBIT. So we don't have any problem with Silicon Laboratories's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Silicon Laboratories, you may well want to click here to check an interactive graph of its earnings per share history.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.

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