Health Check: How Prudently Does X-FAB Silicon Foundries (EPA:XFAB) Use Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that X-FAB Silicon Foundries SE (EPA:XFAB) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for X-FAB Silicon Foundries

What Is X-FAB Silicon Foundries's Net Debt?

The image below, which you can click on for greater detail, shows that X-FAB Silicon Foundries had debt of US$73.7m at the end of September 2020, a reduction from US$124.0m over a year. But it also has US$179.7m in cash to offset that, meaning it has US$106.0m net cash.

How Healthy Is X-FAB Silicon Foundries's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that X-FAB Silicon Foundries had liabilities of US$109.9m due within 12 months and liabilities of US$84.3m due beyond that. Offsetting this, it had US$179.7m in cash and US$51.3m in receivables that were due within 12 months. So it actually has US$36.8m more liquid assets than total liabilities.

This surplus suggests that X-FAB Silicon Foundries has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, X-FAB Silicon Foundries boasts net cash, so it's fair to say it does not have a heavy debt load! 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 X-FAB Silicon Foundries'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.

In the last year X-FAB Silicon Foundries had a loss before interest and tax, and actually shrunk its revenue by 14%, to US$455m. That's not what we would hope to see.

So How Risky Is X-FAB Silicon Foundries?

Although X-FAB Silicon Foundries had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$10m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that X-FAB Silicon Foundries is showing 1 warning sign in our investment analysis , you should know about...

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.

If you’re looking to trade X-FAB Silicon Foundries, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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