Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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, Xilinx, Inc. (NASDAQ:XLNX) does carry debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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.
What Is Xilinx's Debt?
The image below, which you can click on for greater detail, shows that Xilinx had debt of US$1.25b at the end of December 2019, a reduction from US$1.74b over a year. But on the other hand it also has US$2.43b in cash, leading to a US$1.18b net cash position.
How Healthy Is Xilinx's Balance Sheet?
According to the last reported balance sheet, Xilinx had liabilities of US$515.9m due within 12 months, and liabilities of US$1.79b due beyond 12 months. Offsetting this, it had US$2.43b in cash and US$253.5m in receivables that were due within 12 months. So it actually has US$368.7m more liquid assets than total liabilities.
Having regard to Xilinx's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$19.4b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Xilinx boasts net cash, so it's fair to say it does not have a heavy debt load!
On the other hand, Xilinx saw its EBIT drop by 3.4% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Xilinx's ability to maintain a healthy balance sheet going forward. 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. Xilinx 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. Over the last three years, Xilinx actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
While we empathize with investors who find debt concerning, you should keep in mind that Xilinx has net cash of US$1.18b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$1.0b, being 114% of its EBIT. So we don't think Xilinx's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Xilinx .
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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