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. We can see that Skyworks Solutions, Inc. (NASDAQ:SWKS) does use debt in its business. But the real question is whether this debt is making the company risky.
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Skyworks Solutions
What Is Skyworks Solutions's Debt?
As you can see below, Skyworks Solutions had US$993.6m of debt at March 2024, down from US$1.99b a year prior. But it also has US$1.22b in cash to offset that, meaning it has US$224.7m net cash.
How Strong Is Skyworks Solutions' Balance Sheet?
According to the last reported balance sheet, Skyworks Solutions had liabilities of US$606.4m due within 12 months, and liabilities of US$1.34b due beyond 12 months. Offsetting this, it had US$1.22b in cash and US$615.3m in receivables that were due within 12 months. So its liabilities total US$116.9m more than the combination of its cash and short-term receivables.
This state of affairs indicates that Skyworks Solutions' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$17.1b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Skyworks Solutions also has more cash than debt, so we're pretty confident it can manage its debt safely.
It is just as well that Skyworks Solutions's load is not too heavy, because its EBIT was down 32% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Skyworks Solutions'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. While Skyworks Solutions 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 three years, Skyworks Solutions recorded free cash flow worth a fulsome 99% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.
Summing Up
We could understand if investors are concerned about Skyworks Solutions's liabilities, but we can be reassured by the fact it has has net cash of US$224.7m. The cherry on top was that in converted 99% of that EBIT to free cash flow, bringing in US$1.6b. So we are not troubled with Skyworks Solutions's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Skyworks Solutions that you should be aware of.
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.
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About NasdaqGS:SWKS
Skyworks Solutions
Designs, develops, manufactures, and markets proprietary semiconductor products in the United States, China, South Korea, Taiwan, Europe, the Middle East, Africa, and the rest of Asia-Pacific.
Excellent balance sheet established dividend payer.
