We Think ASML Holding (AMS:ASML) Can Manage Its Debt With Ease

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 can see that ASML Holding N.V. (AMS:ASML) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for ASML Holding

What Is ASML Holding's Debt?

The image below, which you can click on for greater detail, shows that ASML Holding had debt of €3.95b at the end of April 2022, a reduction from €4.63b over a year. But it also has €4.72b in cash to offset that, meaning it has €770.9m net cash.

A Look At ASML Holding's Liabilities

The latest balance sheet data shows that ASML Holding had liabilities of €13.6b due within a year, and liabilities of €7.81b falling due after that. On the other hand, it had cash of €4.72b and €5.94b worth of receivables due within a year. So its liabilities total €10.8b more than the combination of its cash and short-term receivables.

Of course, ASML Holding has a titanic market capitalization of €211.6b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, ASML Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that ASML Holding grew its EBIT at 11% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine ASML Holding's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

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. Happily for any shareholders, ASML Holding actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that ASML Holding has €770.9m in net cash. The cherry on top was that in converted 114% of that EBIT to free cash flow, bringing in €10b. So we don't think ASML Holding's use of debt is risky. 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.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.