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.' 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. Importantly, Skyworks Solutions, Inc. (NASDAQ:SWKS) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Skyworks Solutions Carry?

The image below, which you can click on for greater detail, shows that Skyworks Solutions had debt of US$994.3m at the end of September 2024, a reduction from US$1.29b over a year. But on the other hand it also has US$1.56b in cash, leading to a US$568.4m net cash position.

How Strong Is Skyworks Solutions' Balance Sheet?

According to the last reported balance sheet, Skyworks Solutions had liabilities of US$602.7m due within 12 months, and liabilities of US$1.34b due beyond 12 months. On the other hand, it had cash of US$1.56b and US$508.8m worth of receivables due within a year. So it actually has US$124.9m more liquid assets than total liabilities.

Having regard to Skyworks Solutions' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$13.4b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Skyworks Solutions has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Skyworks Solutions if management cannot prevent a repeat of the 32% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Skyworks Solutions'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Skyworks Solutions has net cash of US$568.4m, as well as more liquid assets than liabilities. The cherry on top was that in converted 119% of that EBIT to free cash flow, bringing in US$1.6b. So we don't have any problem with Skyworks Solutions's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Skyworks Solutions .

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.