Silicon Laboratories (NASDAQ:SLAB) Seems To Use Debt Quite Sensibly

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 can see that Silicon Laboratories Inc. (NASDAQ:SLAB) does use debt in its business. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Silicon Laboratories

What Is Silicon Laboratories's Debt?

You can click the graphic below for the historical numbers, but it shows that as of October 2022 Silicon Laboratories had US$529.1m of debt, an increase on US$445.1m, over one year. But it also has US$1.38b in cash to offset that, meaning it has US$847.3m net cash.

A Look At Silicon Laboratories' Liabilities

Zooming in on the latest balance sheet data, we can see that Silicon Laboratories had liabilities of US$205.7m due within 12 months and liabilities of US$579.0m due beyond that. Offsetting these obligations, it had cash of US$1.38b as well as receivables valued at US$76.7m due within 12 months. So it can boast US$668.4m 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.

Although Silicon Laboratories made a loss at the EBIT level, last year, it was also good to see that it generated US$98m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. 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're focused on the future you can check out this free report showing analyst profit forecasts.

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. Over the last year, Silicon Laboratories saw substantial negative free cash flow, in total. 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$847.3m, as well as more liquid assets than liabilities. So we don't have any problem with Silicon Laboratories's use of debt. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Silicon Laboratories you should know about.

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.