Giga Device Semiconductor (SHSE:603986) Has A Rock Solid Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, Giga Device Semiconductor Inc. (SHSE:603986) does carry debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Giga Device Semiconductor

What Is Giga Device Semiconductor's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Giga Device Semiconductor had debt of CN¥700.0m, up from none in one year. However, it does have CN¥9.27b in cash offsetting this, leading to net cash of CN¥8.57b.

How Strong Is Giga Device Semiconductor's Balance Sheet?

The latest balance sheet data shows that Giga Device Semiconductor had liabilities of CN¥1.97b due within a year, and liabilities of CN¥197.2m falling due after that. Offsetting these obligations, it had cash of CN¥9.27b as well as receivables valued at CN¥262.7m due within 12 months. So it actually has CN¥7.36b more liquid assets than total liabilities.

This short term liquidity is a sign that Giga Device Semiconductor could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Giga Device Semiconductor has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Giga Device Semiconductor has boosted its EBIT by 98%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Giga Device 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Giga Device 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. Over the last three years, Giga Device Semiconductor recorded free cash flow worth a fulsome 86% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Giga Device Semiconductor has CN¥8.57b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥1.6b, being 86% of its EBIT. So we don't think Giga Device Semiconductor's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Giga Device Semiconductor has 1 warning sign we think you should be aware of.

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.

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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.