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.' 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 Skyworks Solutions, Inc. (NASDAQ:SWKS) does use debt in its business. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Skyworks Solutions's Debt?
As you can see below, Skyworks Solutions had US$993.2m of debt at December 2023, down from US$2.19b a year prior. But it also has US$1.05b in cash to offset that, meaning it has US$52.4m net cash.
A Look At Skyworks Solutions' Liabilities
Zooming in on the latest balance sheet data, we can see that Skyworks Solutions had liabilities of US$615.1m due within 12 months and liabilities of US$1.39b due beyond that. On the other hand, it had cash of US$1.05b and US$659.4m worth of receivables due within a year. So it has liabilities totalling US$296.9m more than its cash and near-term receivables, combined.
This state of affairs indicates that Skyworks Solutions' 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$16.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Skyworks Solutions also has more cash than debt, so we're pretty confident it can manage its debt safely.
The modesty of its debt load may become crucial for Skyworks Solutions if management cannot prevent a repeat of the 28% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Skyworks Solutions 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. Skyworks Solutions 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 three years, Skyworks Solutions generated free cash flow amounting to a very robust 99% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.
Summing Up
While it is always sensible to look at a company's total liabilities, it is very reassuring that Skyworks Solutions has US$52.4m in net cash. And it impressed us with free cash flow of US$1.7b, being 99% of its EBIT. So we are not troubled with Skyworks Solutions's debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Skyworks Solutions's earnings per share history for free.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.