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 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. We note that Amazon.com, Inc. (NASDAQ:AMZN) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Amazon.com Carry?
As you can see below, at the end of March 2021, Amazon.com had US$33.7b of debt, up from US$24.7b a year ago. Click the image for more detail. However, it does have US$73.3b in cash offsetting this, leading to net cash of US$39.5b.
How Strong Is Amazon.com's Balance Sheet?
We can see from the most recent balance sheet that Amazon.com had liabilities of US$115.4b falling due within a year, and liabilities of US$104.4b due beyond that. Offsetting these obligations, it had cash of US$73.3b as well as receivables valued at US$24.0b due within 12 months. So its liabilities total US$122.5b more than the combination of its cash and short-term receivables.
Given Amazon.com has a humongous market capitalization of US$1.59t, 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. Despite its noteworthy liabilities, Amazon.com boasts net cash, so it's fair to say it does not have a heavy debt load!
Better yet, Amazon.com grew its EBIT by 113% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Amazon.com'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. Amazon.com 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, Amazon.com actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
We could understand if investors are concerned about Amazon.com's liabilities, but we can be reassured by the fact it has has net cash of US$39.5b. The cherry on top was that in converted 106% of that EBIT to free cash flow, bringing in US$22b. So is Amazon.com's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Amazon.com's earnings per share history for free.
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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