We Think Advanced Micro Devices (NASDAQ:AMD) Can Stay On Top Of Its Debt

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. We can see that Advanced Micro Devices, Inc. (NASDAQ:AMD) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can’t easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Advanced Micro Devices

What Is Advanced Micro Devices’s Net Debt?

You can click the graphic below for the historical numbers, but it shows that Advanced Micro Devices had US$445.0m of debt in March 2020, down from US$1.09b, one year before. But it also has US$1.39b in cash to offset that, meaning it has US$940.0m net cash.

debt-equity-history-analysis
NasdaqGS:AMD Debt to Equity History July 22nd 2020

How Strong Is Advanced Micro Devices’s Balance Sheet?

According to the last reported balance sheet, Advanced Micro Devices had liabilities of US$1.99b due within 12 months, and liabilities of US$842.0m due beyond 12 months. Offsetting this, it had US$1.39b in cash and US$1.70b in receivables that were due within 12 months. So it can boast US$253.0m more liquid assets than total liabilities.

Having regard to Advanced Micro Devices’s size, it seems that its liquid assets are well balanced with its total liabilities. So it’s very unlikely that the US$66.8b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Advanced Micro Devices has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Advanced Micro Devices grew its EBIT by 86% over the last twelve months, and that growth will make it easier to handle its debt. 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, a business needs free cash flow to pay off debt; accounting profits just don’t cut it. 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. Over the last three years, Advanced Micro Devices reported free cash flow worth 17% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing up

While it is always sensible to investigate a company’s debt, in this case Advanced Micro Devices has US$940.0m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 86% over the last year. So we don’t think Advanced Micro Devices’s use of debt is risky. 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. Consider risks, for instance. Every company has them, and we’ve spotted 2 warning signs 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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