Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Alpha and Omega Semiconductor Limited (NASDAQ:AOSL) makes use of debt. But the more important question is: how much risk is that debt creating?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Alpha and Omega Semiconductor's Debt?

As you can see below, Alpha and Omega Semiconductor had US$35.5m of debt at September 2024, down from US$47.0m a year prior. But it also has US$176.2m in cash to offset that, meaning it has US$140.7m net cash.

How Healthy Is Alpha and Omega Semiconductor's Balance Sheet?

According to the last reported balance sheet, Alpha and Omega Semiconductor had liabilities of US$151.7m due within 12 months, and liabilities of US$90.6m due beyond 12 months. Offsetting these obligations, it had cash of US$176.2m as well as receivables valued at US$31.1m due within 12 months. So it has liabilities totalling US$35.1m more than its cash and near-term receivables, combined.

Given Alpha and Omega Semiconductor has a market capitalization of US$769.0m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Alpha and Omega Semiconductor boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Alpha and Omega Semiconductor 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.

In the last year Alpha and Omega Semiconductor's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

So How Risky Is Alpha and Omega Semiconductor?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Alpha and Omega Semiconductor had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$8.6m and booked a US$19m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$140.7m. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Alpha and Omega Semiconductor has 3 warning signs we think you should be aware of.

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.