Is X-FAB Silicon Foundries (EPA:XFAB) Using Too Much 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.' 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, X-FAB Silicon Foundries SE (EPA:XFAB) does carry debt. But should shareholders be worried about its use of debt?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Debt?

As you can see below, at the end of March 2023, X-FAB Silicon Foundries had US$270.7m of debt, up from US$129.9m a year ago. Click the image for more detail. But on the other hand it also has US$350.3m in cash, leading to a US$79.6m net cash position.

How Strong Is X-FAB Silicon Foundries' Balance Sheet?

The latest balance sheet data shows that X-FAB Silicon Foundries had liabilities of US$405.8m due within a year, and liabilities of US$63.2m falling due after that. On the other hand, it had cash of US$350.3m and US$93.9m worth of receivables due within a year. So it has liabilities totalling US$24.8m more than its cash and near-term receivables, combined.

Given X-FAB Silicon Foundries has a market capitalization of US$1.18b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, X-FAB Silicon Foundries boasts net cash, so it's fair to say it does not have a heavy debt load!

It is well worth noting that X-FAB Silicon Foundries's EBIT shot up like bamboo after rain, gaining 46% in the last twelve months. That'll make it easier to manage its debt. 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 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 X-FAB Silicon Foundries 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. In the last three years, X-FAB Silicon Foundries basically broke even on a free cash flow basis. Some might say that's a concern, when it comes considering how easily it would be for it to down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that X-FAB Silicon Foundries has US$79.6m in net cash. And it impressed us with its EBIT growth of 46% over the last year. So we are not troubled with X-FAB Silicon Foundries's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for X-FAB Silicon Foundries you should be aware of.

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.