Realtek Semiconductor (TWSE:2379) 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.' 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 Realtek Semiconductor Corp. (TWSE:2379) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Realtek Semiconductor

How Much Debt Does Realtek Semiconductor Carry?

The image below, which you can click on for greater detail, shows that Realtek Semiconductor had debt of NT$4.63b at the end of March 2024, a reduction from NT$15.4b over a year. But it also has NT$46.0b in cash to offset that, meaning it has NT$41.4b net cash.

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$47.0b due within 12 months and liabilities of NT$5.37b due beyond that. Offsetting this, it had NT$46.0b in cash and NT$16.5b in receivables that were due within 12 months. So it can boast NT$10.2b 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. Succinctly put, Realtek Semiconductor boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Realtek Semiconductor's saving grace is its low debt levels, because its EBIT has tanked 33% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Realtek Semiconductor 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. 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. Happily for any shareholders, Realtek Semiconductor actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Realtek Semiconductor has NT$41.4b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 114% of that EBIT to free cash flow, bringing in NT$18b. So we are not troubled with Realtek Semiconductor's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Realtek Semiconductor you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com