Is SkyWater Technology (NASDAQ:SKYT) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We note that SkyWater Technology, Inc. (NASDAQ:SKYT) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

We've discovered 3 warning signs about SkyWater Technology. View them for free.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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.

How Much Debt Does SkyWater Technology Carry?

As you can see below, SkyWater Technology had US$39.4m of debt at December 2024, down from US$62.8m a year prior. However, because it has a cash reserve of US$18.8m, its net debt is less, at about US$20.6m.

A Look At SkyWater Technology's Liabilities

According to the last reported balance sheet, SkyWater Technology had liabilities of US$154.3m due within 12 months, and liabilities of US$96.0m due beyond 12 months. Offsetting these obligations, it had cash of US$18.8m as well as receivables valued at US$76.5m due within 12 months. So it has liabilities totalling US$154.9m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since SkyWater Technology has a market capitalization of US$328.6m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

View our latest analysis for SkyWater Technology

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Given net debt is only 0.87 times EBITDA, it is initially surprising to see that SkyWater Technology's EBIT has low interest coverage of 0.74 times. So while we're not necessarily alarmed we think that its debt is far from trivial. We also note that SkyWater Technology improved its EBIT from a last year's loss to a positive US$6.6m. 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 SkyWater Technology'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Happily for any shareholders, SkyWater Technology actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

Based on what we've seen SkyWater Technology is not finding it easy, given its interest cover, but the other factors we considered give us cause to be optimistic. There's no doubt that its ability to to convert EBIT to free cash flow is pretty flash. When we consider all the elements mentioned above, it seems to us that SkyWater Technology is managing its debt quite well. Having said that, the load is sufficiently heavy that we would recommend any shareholders keep a close eye on it. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for SkyWater Technology you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.