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 Alpha and Omega Semiconductor Limited (NASDAQ:AOSL) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 think about a company's use of debt, we first look at cash and debt together.

What Is Alpha and Omega Semiconductor's Net Debt?

As you can see below, Alpha and Omega Semiconductor had US$44.1m of debt at December 2023, down from US$69.1m a year prior. However, its balance sheet shows it holds US$162.3m in cash, so it actually has US$118.2m net cash.

A Look At Alpha and Omega Semiconductor's Liabilities

According to the last reported balance sheet, Alpha and Omega Semiconductor had liabilities of US$161.6m due within 12 months, and liabilities of US$120.2m due beyond 12 months. Offsetting these obligations, it had cash of US$162.3m as well as receivables valued at US$33.4m due within 12 months. So it has liabilities totalling US$86.2m more than its cash and near-term receivables, combined.

Of course, Alpha and Omega Semiconductor has a market capitalization of US$606.9m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Alpha and Omega Semiconductor also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 Alpha and Omega Semiconductor's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Alpha and Omega Semiconductor had a loss before interest and tax, and actually shrunk its revenue by 19%, to US$640m. We would much prefer see growth.

So How Risky Is Alpha and Omega Semiconductor?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Alpha and Omega Semiconductor had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$90m of cash and made a loss of US$17m. Given it only has net cash of US$118.2m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Alpha and Omega Semiconductor has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.