Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Silicon Laboratories Inc. (NASDAQ:SLAB) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Silicon Laboratories

How Much Debt Does Silicon Laboratories Carry?

The image below, which you can click on for greater detail, shows that at April 2022 Silicon Laboratories had debt of US$528.1m, up from US$434.3m in one year. However, its balance sheet shows it holds US$1.93b in cash, so it actually has US$1.41b net cash.

A Look At Silicon Laboratories' Liabilities

Zooming in on the latest balance sheet data, we can see that Silicon Laboratories had liabilities of US$246.2m due within 12 months and liabilities of US$589.9m due beyond that. On the other hand, it had cash of US$1.93b and US$79.2m worth of receivables due within a year. So it can boast US$1.18b more liquid assets than total liabilities.

This excess liquidity suggests that Silicon Laboratories is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Silicon Laboratories boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, Silicon Laboratories made a loss at the EBIT level, last year, but improved that to positive EBIT of US$15m in the last twelve months. 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 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, a company can only pay off debt with cold hard cash, not accounting profits. Silicon Laboratories 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. During the last year, Silicon Laboratories burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Silicon Laboratories has net cash of US$1.41b, as well as more liquid assets than liabilities. So we are not troubled with Silicon Laboratories's debt use. We'd be motivated to research the stock further if we found out that Silicon Laboratories insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.