Is Silicon Laboratories (NASDAQ:SLAB) 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Silicon Laboratories Inc. (NASDAQ:SLAB) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Silicon Laboratories

What Is Silicon Laboratories's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Silicon Laboratories had US$529.6m of debt, an increase on US$450.6m, over one year. However, its balance sheet shows it holds US$1.19b in cash, so it actually has US$662.4m net cash.

How Strong Is Silicon Laboratories' Balance Sheet?

We can see from the most recent balance sheet that Silicon Laboratories had liabilities of US$185.8m falling due within a year, and liabilities of US$578.6m due beyond that. On the other hand, it had cash of US$1.19b and US$71.4m worth of receivables due within a year. So it can boast US$499.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Silicon Laboratories could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Silicon Laboratories boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Silicon Laboratories made a loss at the EBIT level, last year, it was also good to see that it generated US$119m in EBIT over the last twelve months. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Silicon Laboratories has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last year, Silicon Laboratories's free cash flow amounted to 38% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Silicon Laboratories has net cash of US$662.4m, as well as more liquid assets than liabilities. So we are not troubled with Silicon Laboratories's debt use. 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.

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.