Is Lattice Semiconductor (NASDAQ:LSCC) Using Too Much 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.' 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, Lattice Semiconductor Corporation (NASDAQ:LSCC) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Lattice Semiconductor

What Is Lattice Semiconductor's Debt?

You can click the graphic below for the historical numbers, but it shows that Lattice Semiconductor had US$43.9m of debt in July 2023, down from US$149.4m, one year before. However, it does have US$103.8m in cash offsetting this, leading to net cash of US$59.9m.

A Look At Lattice Semiconductor's Liabilities

We can see from the most recent balance sheet that Lattice Semiconductor had liabilities of US$92.0m falling due within a year, and liabilities of US$92.3m due beyond that. Offsetting these obligations, it had cash of US$103.8m as well as receivables valued at US$104.8m due within 12 months. So it can boast US$24.3m more liquid assets than total liabilities.

This state of affairs indicates that Lattice Semiconductor's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$11.8b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Lattice Semiconductor has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Lattice Semiconductor has boosted its EBIT by 51%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Lattice Semiconductor's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Lattice Semiconductor may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Lattice Semiconductor actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Lattice Semiconductor has US$59.9m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 113% of that EBIT to free cash flow, bringing in US$223m. So we don't think Lattice Semiconductor's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Lattice Semiconductor's earnings per share history for free.

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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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.