ACM Research (NASDAQ:ACMR) Has A Pretty Healthy 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.' 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. As with many other companies ACM Research, Inc. (NASDAQ:ACMR) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for ACM Research

What Is ACM Research's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 ACM Research had US$80.4m of debt, an increase on US$71.8m, over one year. However, its balance sheet shows it holds US$304.6m in cash, so it actually has US$224.2m net cash.

A Look At ACM Research's Liabilities

The latest balance sheet data shows that ACM Research had liabilities of US$482.0m due within a year, and liabilities of US$50.2m falling due after that. Offsetting this, it had US$304.6m in cash and US$284.6m in receivables that were due within 12 months. So it can boast US$57.1m more liquid assets than total liabilities.

This short term liquidity is a sign that ACM Research could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that ACM Research has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that ACM Research has boosted its EBIT by 45%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if ACM Research can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While ACM Research 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, ACM Research burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that ACM Research has net cash of US$224.2m, as well as more liquid assets than liabilities. And we liked the look of last year's 45% year-on-year EBIT growth. So we are not troubled with ACM Research's debt use. 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 ACM Research has 2 warning signs (and 1 which is concerning) we think you should know about.

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.