Here's Why Alpha and Omega Semiconductor (NASDAQ:AOSL) Can Manage Its Debt Responsibly

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 Alpha and Omega Semiconductor Limited (NASDAQ:AOSL) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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 Alpha and Omega Semiconductor

What Is Alpha and Omega Semiconductor's Net Debt?

The chart below, which you can click on for greater detail, shows that Alpha and Omega Semiconductor had US$133.9m in debt in September 2021; about the same as the year before. But on the other hand it also has US$252.5m in cash, leading to a US$118.5m net cash position.

A Look At Alpha and Omega Semiconductor's Liabilities

Zooming in on the latest balance sheet data, we can see that Alpha and Omega Semiconductor had liabilities of US$257.1m due within 12 months and liabilities of US$192.6m due beyond that. Offsetting this, it had US$252.5m in cash and US$44.1m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$153.1m.

Since publicly traded Alpha and Omega Semiconductor shares are worth a total of US$1.50b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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!

It was also good to see that despite losing money on the EBIT line last year, Alpha and Omega Semiconductor turned things around in the last 12 months, delivering and EBIT of US$79m. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While Alpha and Omega Semiconductor does have more liabilities than liquid assets, it also has net cash of US$118.5m. The cherry on top was that in converted 144% of that EBIT to free cash flow, bringing in US$113m. So we don't think Alpha and Omega Semiconductor's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Alpha and Omega Semiconductor is showing 2 warning signs in our investment analysis , you should know about...

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.