We believe Skyworks Solutions (NASDAQ: SWKS) can manage its debt with ease
David Iben put it well when he said: âVolatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. We can see that Skyworks Solutions, Inc. (NASDAQ: SWKS) uses debt in its business. But does this debt concern shareholders?
What risk does debt entail?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. If things really go wrong, lenders can take over the business. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. 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. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
What is Skyworks Solutions’ net debt?
As you can see below, at the end of July 2021, Skyworks Solutions was in debt of $ 1.49 billion, down from zero a year ago. Click on the image for more details. But it also has $ 2.97 billion in cash to make up for that, which means it has $ 1.49 billion in net cash.
NasdaqGS: SWKS History of debt to equity November 2, 2021
How healthy is Skyworks Solutions’ balance sheet?
Zooming in on the latest balance sheet data, we can see that Skyworks Solutions had a liability of US $ 578.3 million due within 12 months and a liability of US $ 1.91 billion beyond. In compensation for these obligations, he had cash of US $ 2.97 billion as well as receivables valued at US $ 570.5 million due within 12 months. He can therefore claim $ 1.06 billion in liquid assets more than total Liabilities.
This short-term liquidity is a sign that Skyworks Solutions could probably repay its debt easily, as its balance sheet is far from tight. In short, Skyworks Solutions has a net cash flow, so it’s fair to say that it doesn’t have a lot of debt!
On top of that, Skyworks Solutions has increased its EBIT by 72% over the past twelve months, and this growth will make it easier to process its debt. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future profits, more than anything, that will determine Skyworks Solutions’ ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals are thinking, you might find this free report on analysts’ earnings forecasts Be interesting.
Finally, a business needs free cash flow to repay its debts; accounting profits are not enough. While Skyworks Solutions has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it’s building ( or erodes) this cash balance. Over the past three years, Skyworks Solutions has generated strong free cash flow equivalent to 80% of its EBIT, roughly what we expected. This hard cash allows him to reduce his debt whenever he wants.
While it’s always a good idea to investigate a company’s debt, in this case Skyworks Solutions has a net cash position of $ 1.49 billion and a decent balance sheet. And it impressed us with its 72% EBIT growth over last year. We therefore do not believe that Skyworks Solutions’ use of debt is risky. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. Be aware that Skyworks Solutions shows 2 warning signs in our investment analysis , you must know…
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
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