Is Silvaco Group (NASDAQ:SVCO) 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Silvaco Group, Inc. (NASDAQ:SVCO) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Silvaco Group

What Is Silvaco Group's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Silvaco Group had debt of US$4.59m, up from US$2.00m in one year. But it also has US$100.4m in cash to offset that, meaning it has US$95.8m net cash.

A Look At Silvaco Group's Liabilities

According to the last reported balance sheet, Silvaco Group had liabilities of US$40.4m due within 12 months, and liabilities of US$7.36m due beyond 12 months. On the other hand, it had cash of US$100.4m and US$15.0m worth of receivables due within a year. So it can boast US$67.6m more liquid assets than total liabilities.

This excess liquidity is a great indication that Silvaco Group's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Silvaco Group has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Silvaco Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Silvaco Group wasn't profitable at an EBIT level, but managed to grow its revenue by 5.3%, to US$54m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Silvaco Group?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Silvaco Group had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$10m and booked a US$46m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$95.8m. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Silvaco Group that you should be aware of before investing here.

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.