We Think Elmos Semiconductor (ETR:ELG) Can Stay On Top Of Its Debt

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, Elmos Semiconductor SE (ETR:ELG) does carry debt. But the real question is whether this debt is making the company risky.

We check all companies for important risks. See what we found for Elmos Semiconductor in our free report.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Elmos Semiconductor's Debt?

You can click the graphic below for the historical numbers, but it shows that Elmos Semiconductor had €102.8m of debt in March 2025, down from €118.4m, one year before. On the flip side, it has €101.7m in cash leading to net debt of about €1.14m.

How Strong Is Elmos Semiconductor's Balance Sheet?

We can see from the most recent balance sheet that Elmos Semiconductor had liabilities of €85.8m falling due within a year, and liabilities of €116.7m due beyond that. On the other hand, it had cash of €101.7m and €109.2m worth of receivables due within a year. So it actually has €8.42m more liquid assets than total liabilities.

Having regard to Elmos Semiconductor's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the €1.09b company is short on cash, but still worth keeping an eye on the balance sheet. Carrying virtually no net debt, Elmos Semiconductor has a very light debt load indeed.

View our latest analysis for Elmos Semiconductor

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Elmos Semiconductor has very little debt (net of cash), and boasts a debt to EBITDA ratio of 0.0059 and EBIT of 62.9 times the interest expense. So relative to past earnings, the debt load seems trivial. Fortunately, Elmos Semiconductor grew its EBIT by 8.3% in the last year, making that debt load look even more manageable. 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 Elmos 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 company can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Elmos Semiconductor recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Our View

The good news is that Elmos Semiconductor's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. But the stark truth is that we are concerned by its conversion of EBIT to free cash flow. Looking at all the aforementioned factors together, it strikes us that Elmos Semiconductor can handle its debt fairly comfortably. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it's worth keeping an eye on this one. Over time, share prices tend to follow earnings per share, so if you're interested in Elmos Semiconductor, you may well want to click here to check an interactive graph of its earnings per share history.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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

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.