Yahoo Finance These 4 Measures Indicate That Advanced Micro Devices (NASDAQ:AMD) Is Using Debt Safely
Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Advanced Micro Devices, Inc. (NASDAQ:AMD) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.
See our latest analysis for Advanced Micro Devices
What Is Advanced Micro Devices's Debt?
You can click the graphic below for the historical numbers, but it shows that Advanced Micro Devices had US$272.0m of debt in March 2021, down from US$488.0m, one year before. But on the other hand it also has US$3.12b in cash, leading to a US$2.84b net cash position.
How Healthy Is Advanced Micro Devices' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Advanced Micro Devices had liabilities of US$2.86b due within 12 months and liabilities of US$706.0m due beyond that. Offsetting these obligations, it had cash of US$3.12b as well as receivables valued at US$2.19b due within 12 months. So it can boast US$1.73b more liquid assets than total liabilities.
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$95.4b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Advanced Micro Devices boasts net cash, so it's fair to say it does not have a heavy debt load!
Better yet, Advanced Micro Devices grew its EBIT by 143% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Advanced Micro Devices 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 most recent three years, Advanced Micro Devices recorded free cash flow worth 63% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Summing up
While it is always sensible to investigate a company's debt, in this case Advanced Micro Devices has US$2.84b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 143% over the last year. So is Advanced Micro Devices's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. 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 2 warning signs for Advanced Micro Devices (of which 1 is potentially serious!) you should know about.
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.
This article by Simply Wall St is general in nature. 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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