ACM Research (NASDAQ:ACMR) Has A Pretty Healthy Balance Sheet

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, ACM Research, Inc. (NASDAQ:ACMR) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for ACM Research

How Much Debt Does ACM Research Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 ACM Research had US$170.5m of debt, an increase on US$80.4m, over one year. But on the other hand it also has US$374.1m in cash, leading to a US$203.6m net cash position.

How Healthy Is ACM Research's Balance Sheet?

The latest balance sheet data shows that ACM Research had liabilities of US$610.0m due within a year, and liabilities of US$115.1m falling due after that. Offsetting these obligations, it had cash of US$374.1m as well as receivables valued at US$428.4m due within 12 months. So it can boast US$77.5m 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. Succinctly put, ACM Research boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that ACM Research has boosted its EBIT by 46%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine ACM Research'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. ACM Research 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, ACM Research saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far 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$203.6m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 46% over the last year. So we don't have any problem with ACM Research's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with ACM Research .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.