SemiLEDs (NASDAQ:LEDS) Has Debt But No Earnings; Should You Worry?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 more important question is: how much risk is that debt creating?

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is SemiLEDs's Net Debt?

As you can see below, SemiLEDs had US$1.87m of debt at February 2025, down from US$3.97m a year prior. However, it does have US$2.38m in cash offsetting this, leading to net cash of US$516.0k.

How Healthy Is SemiLEDs' Balance Sheet?

According to the last reported balance sheet, SemiLEDs had liabilities of US$18.0m due within 12 months, and liabilities of US$1.62m due beyond 12 months. On the other hand, it had cash of US$2.38m and US$280.0k worth of receivables due within a year. So it has liabilities totalling US$16.9m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of US$22.0m, 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. Despite its noteworthy liabilities, SemiLEDs boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. 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.

See our latest analysis for SemiLEDs

In the last year SemiLEDs wasn't profitable at an EBIT level, but managed to grow its revenue by 161%, to US$15m. So there's no doubt that shareholders are cheering for growth

So How Risky Is SemiLEDs?

While SemiLEDs lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$1.2m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. The good news for SemiLEDs shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But that doesn't change our opinion that the stock is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for SemiLEDs (1 shouldn't be ignored!) that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.