Alpha and Omega Semiconductor (NASDAQ:AOSL) Has Debt But No Earnings; Should You Worry?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Alpha and Omega Semiconductor Limited (NASDAQ:AOSL) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out 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 at September 2020 Alpha and Omega Semiconductor had debt of US$132.7m, up from US$85.1m in one year. But it also has US$154.7m in cash to offset that, meaning it has US$22.0m net cash.

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

According to the last reported balance sheet, Alpha and Omega Semiconductor had liabilities of US$198.3m due within 12 months, and liabilities of US$164.3m due beyond 12 months. On the other hand, it had cash of US$154.7m and US$27.6m worth of receivables due within a year. So it has liabilities totalling US$180.2m more than its cash and near-term receivables, combined.

Alpha and Omega Semiconductor has a market capitalization of US$732.5m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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. 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.

In the last year Alpha and Omega Semiconductor wasn't profitable at an EBIT level, but managed to grow its revenue by 9.9%, to US$499m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Alpha and Omega Semiconductor?

While Alpha and Omega Semiconductor lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of US$2.0m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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 example, we've discovered 2 warning signs for Alpha and Omega Semiconductor that you should be aware of before investing here.

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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