Is Realtek Semiconductor (TWSE:2379) Using Too Much Debt?

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. We note that Realtek Semiconductor Corp. (TWSE:2379) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Realtek Semiconductor

How Much Debt Does Realtek Semiconductor Carry?

As you can see below, Realtek Semiconductor had NT$4.50b of debt at December 2024, down from NT$6.48b a year prior. But on the other hand it also has NT$55.1b in cash, leading to a NT$50.6b net cash position.

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How Healthy Is Realtek Semiconductor's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Realtek Semiconductor had liabilities of NT$58.0b due within 12 months and liabilities of NT$2.98b due beyond that. Offsetting these obligations, it had cash of NT$55.1b as well as receivables valued at NT$15.6b due within 12 months. So it actually has NT$9.71b more liquid assets than total liabilities.

This short term liquidity is a sign that Realtek Semiconductor could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Realtek Semiconductor has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Realtek Semiconductor grew its EBIT by 103% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 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. Realtek Semiconductor 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. Happily for any shareholders, Realtek Semiconductor actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Realtek Semiconductor has net cash of NT$50.6b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of NT$20b, being 136% of its EBIT. So we don't think Realtek Semiconductor'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. We've identified 1 warning sign with Realtek Semiconductor , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.