Warren Buffett said: “Volatility is far from synonymous with risk”. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Above all, Alpha and Omega Semiconductor Limited (NASDAQ: AOSL) is in debt. But should shareholders be concerned about its use of debt?
What risk does debt entail?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. When we look at debt levels, we first consider both liquidity and debt levels.
Check out our latest analysis for Alpha and Omega Semiconductor
What is the debt of Alpha and Omega Semiconductor?
As you can see below, at the end of June 2021, Alpha and Omega Semiconductor were in debt of $ 136.0 million, up from $ 129.9 million a year ago. Click on the image for more details. But it also has $ 202.4 million in cash to make up for that, which means it has $ 66.4 million in net cash.
How strong is Alpha and Omega Semiconductor’s balance sheet?
The latest balance sheet data shows that Alpha and Omega Semiconductor had liabilities of US $ 233.2 million due within one year, and liabilities of US $ 169.0 million due thereafter. On the other hand, he had cash of US $ 202.4 million and US $ 39.6 million in receivables due within one year. It therefore has a liability totaling US $ 160.2 million more than its cash and short-term receivables combined.
Given that Alpha and Omega Semiconductor have a market capitalization of US $ 833.5 million, it is hard to believe that these liabilities pose a significant threat. But there are enough liabilities that we would certainly recommend that shareholders continue to monitor the balance sheet going forward. Despite its notable liabilities, Alpha and Omega Semiconductor have clean cash flow, so it’s fair to say that they don’t have a lot of debt!
It was also good to see that despite losing money on the EBIT line last year, Alpha and Omega Semiconductor have turned things around over the past 12 months, delivering EBIT of US $ 64 million. There is no doubt that we learn the most about debt from the balance sheet. But it is future profits, more than anything, that will determine Alpha and Omega Semiconductor’s ability to maintain healthy balance sheets in the future. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a business can only pay off its debts with hard cash, not with book profits. Alpha and Omega Semiconductor may have net cash on the balance sheet, but it’s always interesting to look at the extent to which the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its needs. in its ability to manage debt. Over the past year, Alpha and Omega Semiconductor have recorded free cash flow totaling 87% of their EBIT, which is higher than what we usually expected. This puts him in a very strong position to pay off the debt.
Although Alpha and Omega Semiconductor have more liabilities than liquid assets, they also have net cash of $ 66.4 million. And he impressed us with free cash flow of US $ 56 million, or 87% of his EBIT. We therefore do not believe that Alpha and Omega Semiconductor’s use of debt is risky. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, Alpha and Omega Semiconductor have 1 warning sign we think you should be aware.
At the end of the day, it’s often best to focus on businesses that don’t have net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
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