Stock Analysis

Silicon Laboratories (NASDAQ:SLAB) Could Easily Take On More Debt

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Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Silicon Laboratories Inc. (NASDAQ:SLAB) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Silicon Laboratories

How Much Debt Does Silicon Laboratories Carry?

You can click the graphic below for the historical numbers, but it shows that Silicon Laboratories had US$445.1m of debt in October 2021, down from US$561.7m, one year before. But it also has US$2.73b in cash to offset that, meaning it has US$2.28b net cash.

NasdaqGS:SLAB Debt to Equity History December 20th 2021

How Strong Is Silicon Laboratories' Balance Sheet?

The latest balance sheet data shows that Silicon Laboratories had liabilities of US$458.4m due within a year, and liabilities of US$533.5m falling due after that. Offsetting this, it had US$2.73b in cash and US$72.6m in receivables that were due within 12 months. So it actually has US$1.81b 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!

We also note that Silicon Laboratories improved its EBIT from a last year's loss to a positive US$92m. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Happily for any shareholders, Silicon Laboratories 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.

Summing up

While it is always sensible to investigate a company's debt, in this case Silicon Laboratories has US$2.28b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 110% of that EBIT to free cash flow, bringing in US$100m. So is Silicon Laboratories's debt a risk? It doesn't seem so to us. 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. We've identified 2 warning signs with Silicon Laboratories , and understanding them should be part of your investment process.

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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