Here's Why SemiLEDs (NASDAQ:LEDS) Can Afford Some Debt

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies SemiLEDs Corporation (NASDAQ:LEDS) makes use of debt. But the real question is whether this debt is making the company risky.

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 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for SemiLEDs

How Much Debt Does SemiLEDs Carry?

As you can see below, SemiLEDs had US$7.18m of debt at May 2022, down from US$7.84m a year prior. However, it does have US$3.02m in cash offsetting this, leading to net debt of about US$4.16m.

How Healthy Is SemiLEDs' Balance Sheet?

According to the last reported balance sheet, SemiLEDs had liabilities of US$9.35m due within 12 months, and liabilities of US$3.59m due beyond 12 months. On the other hand, it had cash of US$3.02m and US$1.71m worth of receivables due within a year. So its liabilities total US$8.21m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of US$13.2m, so it does suggest shareholders should keep an eye on SemiLEDs' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But it is SemiLEDs's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year SemiLEDs wasn't profitable at an EBIT level, but managed to grow its revenue by 43%, to US$6.8m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate SemiLEDs's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost a very considerable US$4.2m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$2.9m of cash over the last year. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with SemiLEDs (including 1 which is a bit concerning) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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