Yahoo Finance Is Applied Materials Inc’s (NASDAQ:AMAT) Balance Sheet A Threat To Its Future?
The size of Applied Materials Inc (NASDAQ:AMAT), a US$39.17b large-cap, often attracts investors seeking a reliable investment in the stock market. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. But, its financial health remains the key to continued success. I will provide an overview of Applied Materials’s financial liquidity and leverage to give you an idea of Applied Materials’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into AMAT here.
See our latest analysis for Applied Materials
How much cash does AMAT generate through its operations?
AMAT’s debt level has been constant at around US$5.31b over the previous year – this includes both the current and long-term debt. At this constant level of debt, AMAT currently has US$3.98b remaining in cash and short-term investments for investing into the business. Additionally, AMAT has generated US$3.24b in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 61.0%, meaning that AMAT’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In AMAT’s case, it is able to generate 0.61x cash from its debt capital.
Can AMAT meet its short-term obligations with the cash in hand?
With current liabilities at US$4.32b, it seems that the business has been able to meet these commitments with a current assets level of US$10.89b, leading to a 2.52x current account ratio. Usually, for Semiconductor companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can AMAT service its debt comfortably?
With debt reaching 77.8% of equity, AMAT may be thought of as relatively highly levered. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. We can assess the sustainability of AMAT’s debt levels to the test by looking at how well interest payments are covered by earnings. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. In AMAT’s case, the ratio of 39.98x suggests that interest is amply covered. Large-cap investments like AMAT are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.
Next Steps:
Although AMAT’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around AMAT’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure AMAT has company-specific issues impacting its capital structure decisions. I recommend you continue to research Applied Materials to get a more holistic view of the large-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for AMAT’s future growth? Take a look at our free research report of analyst consensus for AMAT’s outlook.
Valuation: What is AMAT worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether AMAT is currently mispriced by the market.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
