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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 note that X-FAB Silicon Foundries SE (EPA:XFAB) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for X-FAB Silicon Foundries

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

As you can see below, X-FAB Silicon Foundries had US$244.2m of debt at March 2024, down from US$270.7m a year prior. However, it does have US$351.5m in cash offsetting this, leading to net cash of US$107.3m.

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

According to the last reported balance sheet, X-FAB Silicon Foundries had liabilities of US$669.3m due within 12 months, and liabilities of US$63.5m due beyond 12 months. Offsetting this, it had US$351.5m in cash and US$140.7m in receivables that were due within 12 months. So it has liabilities totalling US$240.6m more than its cash and near-term receivables, combined.

This deficit isn't so bad because X-FAB Silicon Foundries is worth US$892.0m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, X-FAB Silicon Foundries also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, X-FAB Silicon Foundries grew its EBIT by 42% over the last twelve months, and that growth will make it easier to handle 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. Over the last three years, X-FAB Silicon Foundries recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While X-FAB Silicon Foundries does have more liabilities than liquid assets, it also has net cash of US$107.3m. And it impressed us with its EBIT growth of 42% over the last year. So we don't have any problem with X-FAB Silicon Foundries's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of X-FAB Silicon Foundries's earnings per share history for free.

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