Is Alpha and Omega Semiconductor (NASDAQ:AOSL) Using Debt Sensibly?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Alpha and Omega Semiconductor

How Much Debt Does Alpha and Omega Semiconductor Carry?

As you can see below, Alpha and Omega Semiconductor had US$35.5m of debt at September 2024, down from US$47.0m a year prior. But it also has US$176.2m in cash to offset that, meaning it has US$140.7m net cash.

A Look At Alpha and Omega Semiconductor's Liabilities

The latest balance sheet data shows that Alpha and Omega Semiconductor had liabilities of US$151.7m due within a year, and liabilities of US$90.6m falling due after that. Offsetting this, it had US$176.2m in cash and US$31.1m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$35.1m.

Given Alpha and Omega Semiconductor has a market capitalization of US$1.11b, it's hard to believe these liabilities pose much 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! There's no doubt that we learn most about debt from the balance sheet. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Alpha and Omega Semiconductor saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

So How Risky Is Alpha and Omega Semiconductor?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Alpha and Omega Semiconductor had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$8.6m of cash and made a loss of US$19m. But the saving grace is the US$140.7m on the balance sheet. That means it could keep spending at its current rate for more than two years. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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 - Alpha and Omega Semiconductor has 2 warning signs we think you should be aware of.

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.

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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.