These 4 Measures Indicate That X-FAB Silicon Foundries (EPA:XFAB) Is Using Debt Reasonably Well

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. We can see that X-FAB Silicon Foundries SE (EPA:XFAB) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for X-FAB Silicon Foundries

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

You can click the graphic below for the historical numbers, but it shows that as of December 2021 X-FAB Silicon Foundries had US$127.0m of debt, an increase on US$51.6m, over one year. However, its balance sheet shows it holds US$290.2m in cash, so it actually has US$163.2m net cash.

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

According to the last reported balance sheet, X-FAB Silicon Foundries had liabilities of US$197.0m due within 12 months, and liabilities of US$45.6m due beyond 12 months. Offsetting these obligations, it had cash of US$290.2m as well as receivables valued at US$73.7m due within 12 months. So it can boast US$121.3m 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. Simply put, the fact that X-FAB Silicon Foundries has more cash than debt is arguably a good indication that it can manage its debt safely.

Although X-FAB Silicon Foundries made a loss at the EBIT level, last year, it was also good to see that it generated US$77m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the most recent year, X-FAB Silicon Foundries recorded free cash flow worth 55% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case X-FAB Silicon Foundries has US$163.2m in net cash and a decent-looking balance sheet. So is X-FAB Silicon Foundries's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with X-FAB Silicon Foundries .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.