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Is Tower Semiconductor (NASDAQ:TSEM) A Risky Investment?

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.' 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, Tower Semiconductor Ltd. (NASDAQ:TSEM) does carry debt. But the real question is whether this debt is making the company risky.

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. 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.

View our latest analysis for Tower Semiconductor

What Is Tower Semiconductor's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Tower Semiconductor had US$164.3m of debt in March 2021, down from US$283.1m, one year before. But it also has US$710.0m in cash to offset that, meaning it has US$545.7m net cash.

debt-equity-history-analysis
debt-equity-history-analysis

How Strong Is Tower Semiconductor's Balance Sheet?

The latest balance sheet data shows that Tower Semiconductor had liabilities of US$273.6m due within a year, and liabilities of US$326.1m falling due after that. Offsetting this, it had US$710.0m in cash and US$164.2m in receivables that were due within 12 months. So it can boast US$274.5m more liquid assets than total liabilities.

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

On top of that, Tower Semiconductor grew its EBIT by 41% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Tower Semiconductor's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Tower Semiconductor may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Tower Semiconductor produced sturdy free cash flow equating to 51% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Tower Semiconductor has US$545.7m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 41% over the last year. So we don't think Tower Semiconductor's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Tower Semiconductor, you may well want to click here to check an interactive graph of its earnings per share history.

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 editorial-team (at) simplywallst.com.

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