X-FAB Silicon Foundries (EPA:XFAB) Has A Rock Solid Balance Sheet

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.' 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 note that X-FAB Silicon Foundries SE (EPA:XFAB) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Debt?

As you can see below, X-FAB Silicon Foundries had US$41.1m of debt at March 2021, down from US$111.2m a year prior. But it also has US$195.8m in cash to offset that, meaning it has US$154.7m net cash.

A Look At X-FAB Silicon Foundries' Liabilities

Zooming in on the latest balance sheet data, we can see that X-FAB Silicon Foundries had liabilities of US$115.7m due within 12 months and liabilities of US$45.0m due beyond that. Offsetting these obligations, it had cash of US$195.8m as well as receivables valued at US$66.1m due within 12 months. So it can boast US$101.2m more liquid assets than total liabilities.

This short term liquidity is a sign that X-FAB Silicon Foundries could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, X-FAB Silicon Foundries boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, X-FAB Silicon Foundries turned things around in the last 12 months, delivering and EBIT of US$648k. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if X-FAB Silicon Foundries can strengthen its balance sheet over time. 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 last year, X-FAB Silicon Foundries actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that X-FAB Silicon Foundries has net cash of US$154.7m, as well as more liquid assets than liabilities. The cherry on top was that in converted 5,569% of that EBIT to free cash flow, bringing in US$36m. 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 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.

If you decide to trade X-FAB Silicon Foundries, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all 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.