We Think Will Semiconductor (SHSE:603501) Can Manage Its Debt With Ease

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.' 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, Will Semiconductor Co., Ltd. (SHSE:603501) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Will Semiconductor

How Much Debt Does Will Semiconductor Carry?

The image below, which you can click on for greater detail, shows that Will Semiconductor had debt of CN¥9.93b at the end of September 2024, a reduction from CN¥12.3b over a year. However, it does have CN¥8.80b in cash offsetting this, leading to net debt of about CN¥1.12b.

A Look At Will Semiconductor's Liabilities

According to the last reported balance sheet, Will Semiconductor had liabilities of CN¥8.24b due within 12 months, and liabilities of CN¥7.46b due beyond 12 months. Offsetting these obligations, it had cash of CN¥8.80b as well as receivables valued at CN¥4.53b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥2.37b.

Since publicly traded Will Semiconductor shares are worth a very impressive total of CN¥116.7b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Carrying virtually no net debt, Will Semiconductor has a very light debt load indeed.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Will Semiconductor's net debt is only 0.36 times its EBITDA. And its EBIT easily covers its interest expense, being 77.6 times the size. So we're pretty relaxed about its super-conservative use of debt. It was also good to see that despite losing money on the EBIT line last year, Will Semiconductor turned things around in the last 12 months, delivering and EBIT of CN¥2.7b. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Will Semiconductor'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Happily for any shareholders, Will Semiconductor actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

Happily, Will Semiconductor's impressive interest cover implies it has the upper hand on its debt. And that's just the beginning of the good news since its conversion of EBIT to free cash flow is also very heartening. Looking at the bigger picture, we think Will Semiconductor's use of debt seems quite reasonable and we're not concerned about it. After all, sensible leverage can boost returns on equity. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Will Semiconductor's earnings per share history for free.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.