X-FAB Silicon Foundries (EPA:XFAB) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, '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. As with many other companies X-FAB Silicon Foundries SE (EPA:XFAB) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View 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$264.0m of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds US$391.3m in cash, so it actually has US$127.3m 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$612.0m due within 12 months, and liabilities of US$53.3m due beyond 12 months. On the other hand, it had cash of US$391.3m and US$137.9m worth of receivables due within a year. So it has liabilities totalling US$136.1m more than its cash and near-term receivables, combined.

Of course, X-FAB Silicon Foundries has a market capitalization of US$1.38b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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!

Even more impressive was the fact that X-FAB Silicon Foundries grew its EBIT by 336% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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, while the tax-man may adore accounting profits, lenders only accept 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 reported free cash flow worth 12% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish 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$127.3m in net cash. And it impressed us with its EBIT growth of 336% 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.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.