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, Advanced Micro Devices, Inc. (NASDAQ:AMD) does carry debt. But should shareholders be worried about its use of debt?
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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
What Is Advanced Micro Devices's Net Debt?
The image below, which you can click on for greater detail, shows that at April 2023 Advanced Micro Devices had debt of US$2.47b, up from US$1.79b in one year. However, it does have US$5.94b in cash offsetting this, leading to net cash of US$3.47b.
How Healthy Is Advanced Micro Devices' Balance Sheet?
The latest balance sheet data shows that Advanced Micro Devices had liabilities of US$6.58b due within a year, and liabilities of US$6.36b falling due after that. Offsetting these obligations, it had cash of US$5.94b as well as receivables valued at US$4.04b due within 12 months. So its liabilities total US$2.96b more than the combination of its cash and short-term receivables.
Having regard to Advanced Micro Devices' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$201.7b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Advanced Micro Devices boasts net cash, so it's fair to say it does not have a heavy debt load!
The modesty of its debt load may become crucial for Advanced Micro Devices if management cannot prevent a repeat of the 96% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Advanced Micro Devices can strengthen its balance sheet over time. 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. Advanced Micro Devices 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. Happily for any shareholders, Advanced Micro Devices actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
While it is always sensible to look at a company's total liabilities, it is very reassuring that Advanced Micro Devices has US$3.47b in net cash. And it impressed us with free cash flow of US$2.5b, being 127% of its EBIT. So we don't have any problem with Advanced Micro Devices's use of debt. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Advanced Micro Devices you should know about.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.
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