Stock Analysis

AMETEK (NYSE:AME) Could Easily Take On More Debt

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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies AMETEK, Inc. (NYSE:AME) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. 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.

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What Is AMETEK's Debt?

The image below, which you can click on for greater detail, shows that AMETEK had debt of US$2.39b at the end of December 2022, a reduction from US$2.54b over a year. However, it also had US$345.4m in cash, and so its net debt is US$2.04b.

NYSE:AME Debt to Equity History March 17th 2023

How Strong Is AMETEK's Balance Sheet?

According to the last reported balance sheet, AMETEK had liabilities of US$1.56b due within 12 months, and liabilities of US$3.39b due beyond 12 months. Offsetting these obligations, it had cash of US$345.4m as well as receivables valued at US$1.04b due within 12 months. So its liabilities total US$3.57b more than the combination of its cash and short-term receivables.

Of course, AMETEK has a titanic market capitalization of US$31.3b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

AMETEK has a low net debt to EBITDA ratio of only 1.1. And its EBIT covers its interest expense a whopping 18.3 times over. So we're pretty relaxed about its super-conservative use of debt. Also good is that AMETEK grew its EBIT at 15% over the last year, further increasing its ability to manage debt. 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 AMETEK 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. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. During the last three years, AMETEK generated free cash flow amounting to a very robust 85% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Our View

Happily, AMETEK's impressive interest cover implies it has the upper hand on its debt. And that's just the beginning of the good news since its conversion of EBIT to free cash flow is also very heartening. Looking at the bigger picture, we think AMETEK's use of debt seems quite reasonable and we're not concerned about it. While debt does bring risk, when used wisely it can also bring a higher return on equity. 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. For example, we've discovered 1 warning sign for AMETEK that you should be aware of before investing here.

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.

What are the risks and opportunities for AMETEK?

AMETEK, Inc. manufactures and sells electronic instruments and electromechanical devices in North America, Europe, Asia, and South America.

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  • Trading at 26.3% below our estimate of its fair value

  • Earnings are forecast to grow 11.43% per year

  • Earnings have grown 8.6% per year over the past 5 years


  • Significant insider selling over the past 3 months

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