ASML Holding (AMS:ASML) Has A Rock Solid Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 ASML Holding N.V. (AMS:ASML) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for ASML Holding

What Is ASML Holding's Net Debt?

You can click the graphic below for the historical numbers, but it shows that ASML Holding had €4.11b of debt in October 2021, down from €4.63b, one year before. However, it does have €4.46b in cash offsetting this, leading to net cash of €349.9m.

A Look At ASML Holding's Liabilities

According to the last reported balance sheet, ASML Holding had liabilities of €9.16b due within 12 months, and liabilities of €6.63b due beyond 12 months. Offsetting these obligations, it had cash of €4.46b as well as receivables valued at €5.13b due within 12 months. So its liabilities total €6.21b more than the combination of its cash and short-term receivables.

Since publicly traded ASML Holding shares are worth a very impressive total of €286.7b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, ASML Holding also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, ASML Holding grew its EBIT by 62% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if ASML Holding 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While ASML Holding 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. During the last three years, ASML Holding generated free cash flow amounting to a very robust 92% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

We could understand if investors are concerned about ASML Holding's liabilities, but we can be reassured by the fact it has has net cash of €349.9m. And it impressed us with free cash flow of €8.1b, being 92% of its EBIT. So is ASML Holding's debt a risk? It doesn't seem so to us. We'd be very excited to see if ASML Holding insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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.