We Think Realtek Semiconductor (TPE:2379) Can Manage Its Debt With Ease

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. As with many other companies Realtek Semiconductor Corp. (TPE:2379) makes use of debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Realtek Semiconductor

What Is Realtek Semiconductor's Debt?

You can click the graphic below for the historical numbers, but it shows that Realtek Semiconductor had NT$13.6b of debt in September 2020, down from NT$17.9b, one year before. But it also has NT$46.7b in cash to offset that, meaning it has NT$33.1b net cash.

A Look At Realtek Semiconductor's Liabilities

According to the last reported balance sheet, Realtek Semiconductor had liabilities of NT$51.4b due within 12 months, and liabilities of NT$2.49b due beyond 12 months. On the other hand, it had cash of NT$46.7b and NT$15.4b worth of receivables due within a year. So it actually has NT$8.14b more liquid assets than total liabilities.

This surplus suggests that Realtek Semiconductor has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Realtek Semiconductor has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Realtek Semiconductor grew its EBIT by 42% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Realtek Semiconductor 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 Realtek Semiconductor 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, Realtek Semiconductor 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 it is always sensible to investigate a company's debt, in this case Realtek Semiconductor has NT$33.1b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 158% of that EBIT to free cash flow, bringing in NT$12b. So we don't think Realtek Semiconductor's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Realtek Semiconductor you should be aware of.

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. 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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