Here's Why Silicon Laboratories (NASDAQ:SLAB) Can Manage Its Debt Responsibly

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.' 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. As with many other companies Silicon Laboratories Inc. (NASDAQ:SLAB) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Silicon Laboratories

How Much Debt Does Silicon Laboratories Carry?

As you can see below, Silicon Laboratories had US$530.1m of debt, at April 2023, which is about the same as the year before. You can click the chart for greater detail. But it also has US$1.15b in cash to offset that, meaning it has US$622.0m net cash.

How Healthy Is Silicon Laboratories' Balance Sheet?

The latest balance sheet data shows that Silicon Laboratories had liabilities of US$693.3m due within a year, and liabilities of US$48.7m falling due after that. On the other hand, it had cash of US$1.15b and US$87.7m worth of receivables due within a year. So it actually has US$497.8m more liquid assets than total liabilities.

This surplus suggests that Silicon Laboratories has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Silicon Laboratories has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Silicon Laboratories grew its EBIT by 605% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Silicon Laboratories'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Silicon Laboratories 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. During the last two years, Silicon Laboratories burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Silicon Laboratories has net cash of US$622.0m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 605% over the last year. So we don't have any problem with Silicon Laboratories's use of debt. 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 Silicon Laboratories'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.