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.' 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, SemiLEDs Corporation (NASDAQ:LEDS) does carry debt. But the real question is whether this debt is making the company risky.
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for SemiLEDs
What Is SemiLEDs's Net Debt?
The image below, which you can click on for greater detail, shows that at November 2020 SemiLEDs had debt of US$7.74m, up from US$6.34m in one year. However, because it has a cash reserve of US$2.69m, its net debt is less, at about US$5.04m.
A Look At SemiLEDs' Liabilities
We can see from the most recent balance sheet that SemiLEDs had liabilities of US$9.15m falling due within a year, and liabilities of US$2.94m due beyond that. Offsetting this, it had US$2.69m in cash and US$594.0k in receivables that were due within 12 months. So it has liabilities totalling US$8.81m more than its cash and near-term receivables, combined.
SemiLEDs has a market capitalization of US$21.9m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since SemiLEDs will need earnings to service that debt. 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 had a loss before interest and tax, and actually shrunk its revenue by 20%, to US$5.2m. We would much prefer see growth.
Caveat Emptor
While SemiLEDs's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping US$3.2m. 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. Another cause for caution is that is bled US$869k in negative free cash flow over the last twelve months. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for SemiLEDs that you should be aware of.
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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About NasdaqCM:LEDS
SemiLEDs
Develops, manufactures, and sells light emitting diode (LED) chips, LED components, and LED modules and systems in the United States, Taiwan, the Netherlands, Germany, Japan, and internationally.
Adequate balance sheet low.