Diodes (NASDAQ:DIOD) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Diodes Incorporated (NASDAQ:DIOD) does carry debt. But is this debt a concern to shareholders?

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 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Diodes

How Much Debt Does Diodes Carry?

As you can see below, Diodes had US$46.7m of debt at June 2024, down from US$89.5m a year prior. But it also has US$273.9m in cash to offset that, meaning it has US$227.2m net cash.

How Strong Is Diodes' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Diodes had liabilities of US$361.0m due within 12 months and liabilities of US$148.5m due beyond that. Offsetting this, it had US$273.9m in cash and US$385.0m in receivables that were due within 12 months. So it can boast US$149.4m more liquid assets than total liabilities.

This surplus suggests that Diodes has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Diodes has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Diodes's load is not too heavy, because its EBIT was down 75% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Diodes'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Diodes 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. In the last three years, Diodes's free cash flow amounted to 40% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Diodes has US$227.2m in net cash and a decent-looking balance sheet. So we don't have any problem with Diodes's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Diodes .

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.