Yahoo Finance We Think Semtech (NASDAQ:SMTC) Can Manage Its Debt With Ease
David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Semtech Corporation (NASDAQ:SMTC) does use debt in its business. But should shareholders be worried about its use of debt?
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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Semtech
What Is Semtech's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Semtech had US$176.8m of debt in August 2021, down from US$188.9m, one year before. But it also has US$274.0m in cash to offset that, meaning it has US$97.2m net cash.
How Healthy Is Semtech's Balance Sheet?
According to the last reported balance sheet, Semtech had liabilities of US$116.4m due within 12 months, and liabilities of US$275.0m due beyond 12 months. Offsetting these obligations, it had cash of US$274.0m as well as receivables valued at US$73.1m due within 12 months. So it has liabilities totalling US$44.4m more than its cash and near-term receivables, combined.
This state of affairs indicates that Semtech's 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$4.99b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Semtech also has more cash than debt, so we're pretty confident it can manage its debt safely.
In addition to that, we're happy to report that Semtech has boosted its EBIT by 67%, thus reducing the spectre of future debt repayments. 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 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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Semtech may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Semtech actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
Summing up
We could understand if investors are concerned about Semtech's liabilities, but we can be reassured by the fact it has has net cash of US$97.2m. The cherry on top was that in converted 135% of that EBIT to free cash flow, bringing in US$110m. So we don't think Semtech's use of debt is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Semtech 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.
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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