Stock Analysis

These 4 Measures Indicate That Silicon Laboratories (NASDAQ:SLAB) Is Using Debt Reasonably Well

  •  Updated
NasdaqGS:SLAB
Source: Shutterstock

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Silicon Laboratories

What Is Silicon Laboratories's Net Debt?

As you can see below, Silicon Laboratories had US$439.7m of debt at July 2021, down from US$571.8m a year prior. But on the other hand it also has US$617.3m in cash, leading to a US$177.6m net cash position.

debt-equity-history-analysis
NasdaqGS:SLAB Debt to Equity History September 5th 2021

How Healthy Is Silicon Laboratories' Balance Sheet?

According to the last reported balance sheet, Silicon Laboratories had liabilities of US$154.9m due within 12 months, and liabilities of US$513.4m due beyond 12 months. Offsetting these obligations, it had cash of US$617.3m as well as receivables valued at US$99.5m due within 12 months. So it can boast US$48.6m 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 while it's hard to imagine that the US$7.02b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Silicon Laboratories boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, Silicon Laboratories made a loss at the EBIT level, last year, but improved that to positive EBIT of US$79m in the last twelve months. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the last year, Silicon Laboratories actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Silicon Laboratories has net cash of US$177.6m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$91m, being 116% of its EBIT. So we are not troubled with Silicon Laboratories's debt use. 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. Be aware that Silicon Laboratories is showing 3 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

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.

When trading Silicon Laboratories or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted


What are the risks and opportunities for Silicon Laboratories?

Silicon Laboratories Inc., a fabless semiconductor company, provides various analog-intensive mixed-signal solutions in the United States, China, and internationally.

View Full Analysis

Rewards

  • Revenue is forecast to grow 11.12% per year

  • Became profitable this year

Risks

  • Earnings are forecast to decline by an average of 24.8% per year for the next 3 years

  • High level of non-cash earnings

View all Risks and Rewards

Share Price

Market Cap

1Y Return

View Company Report

Further research on
Silicon Laboratories

ValuationFinancial HealthInsider TradingManagement Team