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.' 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 Skyworks Solutions, Inc. (NASDAQ:SWKS) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Skyworks Solutions's Net Debt?

The image below, which you can click on for greater detail, shows that Skyworks Solutions had debt of US$993.6m at the end of March 2024, a reduction from US$1.99b over a year. However, its balance sheet shows it holds US$1.22b in cash, so it actually has US$224.7m net cash.

How Strong Is Skyworks Solutions' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Skyworks Solutions had liabilities of US$606.4m due within 12 months and liabilities of US$1.34b due beyond that. Offsetting these obligations, it had cash of US$1.22b as well as receivables valued at US$615.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$116.9m.

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$17.1b 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.

It is just as well that Skyworks Solutions's load is not too heavy, because its EBIT was down 32% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Skyworks Solutions has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Skyworks Solutions recorded free cash flow worth a fulsome 99% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

We could understand if investors are concerned about Skyworks Solutions's liabilities, but we can be reassured by the fact it has has net cash of US$224.7m. The cherry on top was that in converted 99% of that EBIT to free cash flow, bringing in US$1.6b. So we are not troubled with Skyworks Solutions's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Skyworks Solutions that you should be aware of before investing here.

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.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com