We Think Giga Device Semiconductor (SHSE:603986) Can Stay On Top Of Its Debt

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. As with many other companies Giga Device Semiconductor Inc. (SHSE:603986) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

See 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 March 2024 Giga Device Semiconductor had debt of CN¥400.0m, up from none in one year. But on the other hand it also has CN¥9.86b in cash, leading to a CN¥9.46b net cash position.

A Look At Giga Device Semiconductor's Liabilities

Zooming in on the latest balance sheet data, we can see that Giga Device Semiconductor had liabilities of CN¥1.49b due within 12 months and liabilities of CN¥241.1m due beyond that. Offsetting these obligations, it had cash of CN¥9.86b as well as receivables valued at CN¥221.7m due within 12 months. So it actually has CN¥8.35b 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. Succinctly put, Giga Device Semiconductor boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Giga Device Semiconductor's saving grace is its low debt levels, because its EBIT has tanked 93% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Giga Device Semiconductor 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 Giga Device Semiconductor 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. Over the most recent three years, Giga Device Semiconductor recorded free cash flow worth 70% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Giga Device Semiconductor has net cash of CN¥9.46b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥1.3b, being 70% of its EBIT. So we don't have any problem with Giga Device Semiconductor's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Giga Device Semiconductor that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com