Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Giga Device Semiconductor Inc. (SHSE:603986) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Giga Device Semiconductor Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Giga Device Semiconductor had CN¥700.0m of debt, an increase on none, over one year. However, it does have CN¥9.27b in cash offsetting this, leading to net cash of CN¥8.57b.

How Healthy Is Giga Device Semiconductor's Balance Sheet?

We can see from the most recent balance sheet that Giga Device Semiconductor had liabilities of CN¥1.97b falling due within a year, and liabilities of CN¥197.2m due beyond that. Offsetting these obligations, it had cash of CN¥9.27b as well as receivables valued at CN¥262.7m due within 12 months. So it can boast CN¥7.36b more liquid assets than total liabilities.

This short term liquidity is a sign that Giga Device Semiconductor could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Giga Device Semiconductor has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Giga Device Semiconductor grew its EBIT by 98% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Giga Device 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Giga Device Semiconductor 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, Giga Device Semiconductor generated free cash flow amounting to a very robust 86% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Giga Device Semiconductor has net cash of CN¥8.57b, as well as more liquid assets than liabilities. The cherry on top was that in converted 86% of that EBIT to free cash flow, bringing in CN¥1.6b. So we don't think Giga Device Semiconductor's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Giga Device Semiconductor has 1 warning sign we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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.