These 4 Measures Indicate That ASML Holding (AMS:ASML) Is Using Debt Safely

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, ASML Holding N.V. (AMS:ASML) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for ASML Holding

How Much Debt Does ASML Holding Carry?

As you can see below, ASML Holding had €3.97b of debt, at April 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have €6.65b in cash offsetting this, leading to net cash of €2.68b.

A Look At ASML Holding's Liabilities

We can see from the most recent balance sheet that ASML Holding had liabilities of €16.9b falling due within a year, and liabilities of €8.41b due beyond that. On the other hand, it had cash of €6.65b and €5.29b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €13.4b.

Given ASML Holding has a humongous market capitalization of €231.1b, it's hard to believe these liabilities pose much 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 37% 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 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. ASML Holding 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, ASML Holding actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that ASML Holding has €2.68b in net cash. The cherry on top was that in converted 115% of that EBIT to free cash flow, bringing in €8.2b. So is ASML Holding's debt a risk? It doesn't seem so to us. Another factor that would give us confidence in ASML Holding would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.