Warren Buffett famously said, '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. Importantly, Silicon Laboratories Inc. (NASDAQ:SLAB) does carry debt. But should shareholders be worried about its use of debt?
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. If things get really bad, the lenders can take control of the business. 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, 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 think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Silicon Laboratories Carry?
The image below, which you can click on for greater detail, shows that Silicon Laboratories had debt of US$450.6m at the end of January 2022, a reduction from US$563.4m over a year. However, it does have US$2.04b in cash offsetting this, leading to net cash of US$1.59b.
How Strong Is Silicon Laboratories' Balance Sheet?
The latest balance sheet data shows that Silicon Laboratories had liabilities of US$668.8m due within a year, and liabilities of US$77.0m falling due after that. Offsetting these obligations, it had cash of US$2.04b as well as receivables valued at US$98.3m due within 12 months. So it can boast US$1.39b more liquid assets than total liabilities.
It's good to see that Silicon Laboratories has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Silicon Laboratories boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Silicon Laboratories 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.
Over 12 months, Silicon Laboratories reported revenue of US$721m, which is a gain of 41%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Silicon Laboratories?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Silicon Laboratories lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$129m and booked a US$58m accounting loss. With only US$1.59b on the balance sheet, it would appear that its going to need to raise capital again soon. Silicon Laboratories's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Silicon Laboratories , and understanding them should be part of your investment process.
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.
What are the risks and opportunities for Silicon Laboratories?
Earnings are forecast to grow 4.28% per year
Became profitable this year
No risks detected for SLAB from our risks checks.
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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.