X-FAB (EPA: XFAB) silicon foundries seem to use debt rather sparingly

Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say this when he says “The biggest risk in investing is not price volatility, but if you will suffer a loss. permanent capital “. When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. We notice that X-FAB Silicon Foundries SE (EPA: XFAB) has debt on its balance sheet. But the real question is whether this debt makes the business risky.

When is debt dangerous?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we look at debt levels, we first look at cash and debt levels, together.

Check out our latest review for X-FAB silicon foundries

What is the debt of X-FAB Silicon Foundries?

As you can see below, X-FAB Silicon Foundries had $ 49.9 million in debt as of September 2021, up from $ 106.2 million the year before. However, it has US $ 226.0 million in cash offsetting this, leading to a net cash position of US $ 176.1 million.

ENXTPA: XFAB History of debt to equity December 15, 2021

How healthy is the balance sheet of X-FAB silicon foundries?

We can see from the most recent balance sheet that X-FAB Silicon Foundries had a liability of US $ 124.3 million maturing within one year and a liability of US $ 36.4 million due to- of the. In return, he had $ 226.0 million in cash and $ 66.5 million in receivables due within 12 months. So he actually has $ 131.9 million Following liquid assets as total liabilities.

This short-term liquidity is a sign that X-FAB Silicon Foundries could likely repay its debt easily, as its balance sheet is far from tight. Put simply, the fact that X-FAB Silicon Foundries has more cash than debt is arguably a good indication that it can safely manage its debt.

It was also good to see that despite losing money on the EBIT line last year, X-FAB Silicon Foundries has been a game-changer in the past 12 months, delivering EBIT of US $ 63 million. . When analyzing debt levels, the balance sheet is the obvious place to start. But it is future profits, more than anything, that will determine X-FAB Silicon Foundries’ ability to maintain a healthy balance sheet going forward. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.

Finally, a business can only pay off its debts with hard cash, not with book profits. X-FAB Silicon Foundries may have net cash on the balance sheet, but it’s always interesting to examine how well the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need for, and its ability to manage debt. Fortunately for all shareholders, X-FAB Silicon Foundries actually generated more free cash flow than EBIT over the past year. There is nothing better than cash flow to stay in the good favor of your lenders.

In summary

While it’s always a good idea to investigate a company’s debt, in this case X-FAB Silicon Foundries has US $ 176.1 million in net cash and a decent balance sheet. And he impressed us with free cash flow of US $ 64 million, or 101% of his EBIT. So is X-FAB Silicon Foundries’ debt a risk? It does not seem to us. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. For example, we have identified 1 warning sign for X-FAB silicon foundries that you need to be aware of.

If you want to invest in companies that can generate profits without the burden of debt, check out this free list of growing companies that have net cash on the balance sheet.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.

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