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. As with many other companies Lattice Semiconductor Corporation (NASDAQ:LSCC) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See 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$128.8m of debt in December 2022, down from US$157.9m, one year before. But it also has US$145.7m in cash to offset that, meaning it has US$17.0m net cash.

How Strong Is Lattice Semiconductor's Balance Sheet?

We can see from the most recent balance sheet that Lattice Semiconductor had liabilities of US$127.4m falling due within a year, and liabilities of US$184.2m due beyond that. On the other hand, it had cash of US$145.7m and US$101.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$64.5m.

Having regard to Lattice Semiconductor's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$13.1b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Lattice Semiconductor boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Lattice Semiconductor grew its EBIT by 85% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. 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'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. 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 look at a company's total liabilities, it is very reassuring that Lattice Semiconductor has US$17.0m in net cash. And it impressed us with free cash flow of US$204m, being 120% of its EBIT. So we don't think Lattice Semiconductor's use of debt is risky. Another factor that would give us confidence in Lattice Semiconductor would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

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.