Alpha and Omega Semiconductor (NASDAQ:AOSL) Has A Rock Solid Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Alpha and Omega Semiconductor Limited (NASDAQ:AOSL) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Alpha and Omega Semiconductor

What Is Alpha and Omega Semiconductor's Debt?

As you can see below, Alpha and Omega Semiconductor had US$73.7m of debt at September 2022, down from US$133.9m a year prior. But it also has US$316.1m in cash to offset that, meaning it has US$242.4m net cash.

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

According to the last reported balance sheet, Alpha and Omega Semiconductor had liabilities of US$244.3m due within 12 months, and liabilities of US$181.6m due beyond 12 months. Offsetting these obligations, it had cash of US$316.1m as well as receivables valued at US$56.9m due within 12 months. So it has liabilities totalling US$53.0m more than its cash and near-term receivables, combined.

Of course, Alpha and Omega Semiconductor has a market capitalization of US$963.9m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Alpha and Omega Semiconductor also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Alpha and Omega Semiconductor grew its EBIT by 30% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Alpha and Omega Semiconductor's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Alpha and Omega 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. During the last two years, Alpha and Omega Semiconductor produced sturdy free cash flow equating to 74% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

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$242.4m. And we liked the look of last year's 30% year-on-year EBIT growth. So is Alpha and Omega Semiconductor's debt a risk? It doesn't seem so to us. 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. For instance, we've identified 3 warning signs for Alpha and Omega Semiconductor (2 make us uncomfortable) 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. 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.