These 4 Measures Indicate That Diodes (NASDAQ:DIOD) Is Using Debt Safely

Warren Buffett famously said, '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. Importantly, Diodes Incorporated (NASDAQ:DIOD) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Diodes

How Much Debt Does Diodes Carry?

The image below, which you can click on for greater detail, shows that Diodes had debt of US$125.5m at the end of March 2023, a reduction from US$231.7m over a year. However, it does have US$331.9m in cash offsetting this, leading to net cash of US$206.5m.

How Strong Is Diodes' Balance Sheet?

We can see from the most recent balance sheet that Diodes had liabilities of US$390.3m falling due within a year, and liabilities of US$229.5m due beyond that. On the other hand, it had cash of US$331.9m and US$369.1m worth of receivables due within a year. So it actually has US$81.1m more liquid assets than total liabilities.

Having regard to Diodes' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$4.25b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Diodes boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Diodes has been able to increase its EBIT by 24% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Diodes 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. 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. Over the most recent three years, Diodes recorded free cash flow worth 57% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Diodes has net cash of US$206.5m, as well as more liquid assets than liabilities. And we liked the look of last year's 24% year-on-year EBIT growth. So is Diodes'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. Case in point: We've spotted 2 warning signs for Diodes you should be aware of, and 1 of them is significant.

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.