Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Semtech Corporation (NASDAQ:SMTC) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

Check out our latest analysis for Semtech

What Is Semtech's Net Debt?

As you can see below, Semtech had US$181.8m of debt, at May 2022, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$288.7m in cash offsetting this, leading to net cash of US$106.9m.

How Strong Is Semtech's Balance Sheet?

According to the last reported balance sheet, Semtech had liabilities of US$110.4m due within 12 months, and liabilities of US$270.3m due beyond 12 months. Offsetting these obligations, it had cash of US$288.7m as well as receivables valued at US$66.4m due within 12 months. So it has liabilities totalling US$25.7m more than its cash and near-term receivables, combined.

Having regard to Semtech's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$3.96b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Semtech boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Semtech has boosted its EBIT by 89%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Semtech'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.