Is Semtech (NASDAQ:SMTC) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Semtech Corporation (NASDAQ:SMTC) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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 Semtech

How Much Debt Does Semtech Carry?

As you can see below, at the end of October 2023, Semtech had US$1.37b of debt, up from US$455.1m a year ago. Click the image for more detail. However, it does have US$146.5m in cash offsetting this, leading to net debt of about US$1.23b.

A Look At Semtech's Liabilities

Zooming in on the latest balance sheet data, we can see that Semtech had liabilities of US$239.0m due within 12 months and liabilities of US$1.46b due beyond that. On the other hand, it had cash of US$146.5m and US$156.6m worth of receivables due within a year. So it has liabilities totalling US$1.40b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of US$1.44b, so it does suggest shareholders should keep an eye on Semtech's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Semtech'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.

In the last year Semtech wasn't profitable at an EBIT level, but managed to grow its revenue by 8.2%, to US$843m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Semtech produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$74m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$161m of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Semtech is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.