SEMITEC (TYO:6626) Has A Pretty Healthy Balance Sheet

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. Importantly, SEMITEC Corporation (TYO:6626) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 SEMITEC

What Is SEMITEC's Debt?

As you can see below, SEMITEC had JP¥3.73b of debt at September 2020, down from JP¥4.12b a year prior. However, its balance sheet shows it holds JP¥4.42b in cash, so it actually has JP¥691.0m net cash.

A Look At SEMITEC's Liabilities

According to the last reported balance sheet, SEMITEC had liabilities of JP¥5.34b due within 12 months, and liabilities of JP¥2.44b due beyond 12 months. Offsetting these obligations, it had cash of JP¥4.42b as well as receivables valued at JP¥3.97b due within 12 months. So it can boast JP¥600.0m more liquid assets than total liabilities.

This surplus suggests that SEMITEC has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, SEMITEC boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, SEMITEC grew its EBIT by 63% 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 ultimately the future profitability of the business will decide if SEMITEC can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. SEMITEC may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, SEMITEC created free cash flow amounting to 11% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that SEMITEC has net cash of JP¥691.0m, as well as more liquid assets than liabilities. And we liked the look of last year's 63% year-on-year EBIT growth. So we don't think SEMITEC's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for SEMITEC you should be aware of.

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.

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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.
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