These 4 Measures Indicate That Lattice Semiconductor (NASDAQ:LSCC) Is Using Debt Safely

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 Lattice Semiconductor Corporation (NASDAQ:LSCC) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Lattice Semiconductor

What Is Lattice Semiconductor's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Lattice Semiconductor had US$157.9m of debt in January 2022, down from US$170.7m, one year before. However, because it has a cash reserve of US$131.6m, its net debt is less, at about US$26.4m.

How Healthy Is Lattice Semiconductor's Balance Sheet?

We can see from the most recent balance sheet that Lattice Semiconductor had liabilities of US$106.2m falling due within a year, and liabilities of US$208.7m due beyond that. Offsetting these obligations, it had cash of US$131.6m as well as receivables valued at US$79.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$103.4m.

Having regard to Lattice Semiconductor's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$7.88b company is struggling for cash, we still think it's worth monitoring its balance sheet. But either way, Lattice Semiconductor has virtually no net debt, so it's fair to say it does not have a heavy debt load!

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Lattice Semiconductor's net debt is only 0.21 times its EBITDA. And its EBIT easily covers its interest expense, being 37.6 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. On top of that, Lattice Semiconductor grew its EBIT by 83% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Lattice Semiconductor can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of that EBIT is backed by free cash flow. Happily for any shareholders, Lattice Semiconductor actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our View

Lattice Semiconductor's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And that's just the beginning of the good news since its conversion of EBIT to free cash flow is also very heartening. We think Lattice Semiconductor is no more beholden to its lenders, than the birds are to birdwatchers. To our minds it has a healthy happy balance sheet. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Lattice Semiconductor you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.