Alpha and Omega Semiconductor (NASDAQ:AOSL) Has A Rock Solid 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. We note that Alpha and Omega Semiconductor Limited (NASDAQ:AOSL) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Alpha and Omega Semiconductor

How Much Debt Does Alpha and Omega Semiconductor Carry?

The image below, which you can click on for greater detail, shows that Alpha and Omega Semiconductor had debt of US$65.2m at the end of March 2022, a reduction from US$134.1m over a year. But it also has US$323.1m in cash to offset that, meaning it has US$257.9m net cash.

How Strong Is Alpha and Omega Semiconductor's Balance Sheet?

We can see from the most recent balance sheet that Alpha and Omega Semiconductor had liabilities of US$199.5m falling due within a year, and liabilities of US$182.8m due beyond that. On the other hand, it had cash of US$323.1m and US$40.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$18.7m.

This state of affairs indicates that Alpha and Omega Semiconductor's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$939.0m company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Alpha and Omega Semiconductor boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Alpha and Omega Semiconductor grew its EBIT by 163% over twelve months. That boost will make it even easier to pay down debt going forward. 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 Alpha and Omega 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Alpha and Omega 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, Alpha and Omega Semiconductor actually produced more free cash flow than EBIT over the last two years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

We could understand if investors are concerned about Alpha and Omega Semiconductor's liabilities, but we can be reassured by the fact it has has net cash of US$257.9m. The cherry on top was that in converted 122% of that EBIT to free cash flow, bringing in US$107m. So we don't think Alpha and Omega 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. Be aware that Alpha and Omega Semiconductor is showing 4 warning signs in our investment analysis , and 2 of those don't sit too well with us...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.