Yahoo Finance Does Silicon Laboratories (NASDAQ:SLAB) Have A Healthy Balance Sheet?
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Silicon Laboratories Inc. (NASDAQ:SLAB) does have debt on its balance sheet. 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Silicon Laboratories
How Much Debt Does Silicon Laboratories Carry?
As you can see below, Silicon Laboratories had US$404.4m of debt at April 2021, down from US$682.0m a year prior. But it also has US$572.9m in cash to offset that, meaning it has US$168.5m net cash.
A Look At Silicon Laboratories' Liabilities
We can see from the most recent balance sheet that Silicon Laboratories had liabilities of US$150.8m falling due within a year, and liabilities of US$512.8m due beyond that. On the other hand, it had cash of US$572.9m and US$103.7m worth of receivables due within a year. So these liquid assets roughly match the total liabilities.
This state of affairs indicates that Silicon Laboratories' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$6.05b 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!
Silicon Laboratories grew its EBIT by 4.4% in the last year. Whilst that hardly knocks our socks off it is a positive when it comes to debt. There's no doubt that we learn most about debt from the balance sheet. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 three years, 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$168.5m, as well as more liquid assets than liabilities. The cherry on top was that in converted 218% of that EBIT to free cash flow, bringing in US$68m. So we are not troubled with Silicon Laboratories's debt use. 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. To that end, you should be aware of the 2 warning signs we've spotted with Silicon Laboratories .
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.
This article by Simply Wall St is general in nature. 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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