Warren Buffett famously said, '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 the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Silicon Laboratories Carry?
You can click the graphic below for the historical numbers, but it shows that as of October 2020 Silicon Laboratories had US$543.8m of debt, an increase on US$364.8m, over one year. But it also has US$721.8m in cash to offset that, meaning it has US$178.0m net cash.
A Look At Silicon Laboratories' Liabilities
We can see from the most recent balance sheet that Silicon Laboratories had liabilities of US$151.1m falling due within a year, and liabilities of US$621.9m due beyond that. On the other hand, it had cash of US$721.8m and US$80.5m worth of receivables due within a year. So it actually has US$29.2m more liquid assets than total liabilities.
Having regard to Silicon Laboratories' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$6.25b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Silicon Laboratories has more cash than debt is arguably a good indication that it can manage its debt safely.
Importantly, Silicon Laboratories's EBIT fell a jaw-dropping 42% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. The balance sheet is clearly the area to focus on when you are analysing debt. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Over the last three years, Silicon Laboratories actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
While we empathize with investors who find debt concerning, you should keep in mind that Silicon Laboratories has net cash of US$178.0m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$140m, being 234% of its EBIT. So we don't have any problem with Silicon Laboratories's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Silicon Laboratories (1 is concerning!) that you should be aware of before investing here.
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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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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