How Financially Strong Is SemiLEDs Corporation (NASDAQ:LEDS)?

SemiLEDs Corporation (NASDAQ:LEDS) is a small-cap stock with a market capitalization of US$11.66M. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Companies operating in the Semiconductor industry, especially ones that are currently loss-making, are more likely to be higher risk. So, understanding the company's financial health becomes essential. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into LEDS here.

Does LEDS generate enough cash through operations?

LEDS has shrunken its total debt levels in the last twelve months, from US$2.91M to US$2.73M , which is made up of current and long term debt. With this reduction in debt, LEDS's cash and short-term investments stands at US$3.58M for investing into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn't be too useful, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of LEDS’s operating efficiency ratios such as ROA here.

Does LEDS’s liquid assets cover its short-term commitments?

At the current liabilities level of US$7.46M liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$8.04M, leading to a 1.08x current account ratio. Generally, for Semiconductor companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Does LEDS face the risk of succumbing to its debt-load?

LEDS’s level of debt is appropriate relative to its total equity, at 35.57%. This range is considered safe as LEDS is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. LEDS's risk around capital structure is low, and the company has the headroom and ability to raise debt should it need to in the future.

Next Steps:

Although LEDS’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven't considered other factors such as how LEDS has been performing in the past. You should continue to research SemiLEDs to get a more holistic view of the stock by looking at:

• 1. Valuation: What is LEDS worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether LEDS is currently mispriced by the market.
• 2. Historical Performance: What has LEDS's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
• 3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article 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.