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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that SemiLEDs Corporation (NASDAQ:LEDS) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for SemiLEDs

What Is SemiLEDs's Net Debt?

You can click the graphic below for the historical numbers, but it shows that SemiLEDs had US$3.59m of debt in November 2024, down from US$6.29m, one year before. However, it does have US$1.25m in cash offsetting this, leading to net debt of about US$2.34m.

How Healthy Is SemiLEDs' Balance Sheet?

The latest balance sheet data shows that SemiLEDs had liabilities of US$7.11m due within a year, and liabilities of US$1.71m falling due after that. On the other hand, it had cash of US$1.25m and US$261.0k worth of receivables due within a year. So it has liabilities totalling US$7.31m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since SemiLEDs has a market capitalization of US$14.6m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since SemiLEDs will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, SemiLEDs made a loss at the EBIT level, and saw its revenue drop to US$4.8m, which is a fall of 19%. We would much prefer see growth.

Caveat Emptor

Not only did SemiLEDs's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable US$2.8m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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$656k of cash over the last year. So to be blunt we think it is 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. Be aware that SemiLEDs is showing 4 warning signs in our investment analysis , and 2 of those are significant...

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.