Here's Why ACM Research (NASDAQ:ACMR) Can Manage Its Debt Responsibly

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.' 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. Importantly, ACM Research, Inc. (NASDAQ:ACMR) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See 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 June 2023 ACM Research had US$73.1m of debt, an increase on US$27.9m, over one year. However, it does have US$269.8m in cash offsetting this, leading to net cash of US$196.7m.

A Look At ACM Research's Liabilities

According to the last reported balance sheet, ACM Research had liabilities of US$456.3m due within 12 months, and liabilities of US$27.2m due beyond 12 months. Offsetting this, it had US$269.8m in cash and US$235.2m in receivables that were due within 12 months. So it actually has US$21.5m more liquid assets than total liabilities.

Having regard to ACM Research's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$1.10b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that ACM Research has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, ACM Research grew its EBIT by 110% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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$196.7m, as well as more liquid assets than liabilities. And we liked the look of last year's 110% year-on-year EBIT growth. So we are not troubled with ACM Research's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for ACM Research (1 is potentially serious) you should be aware of.

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.