Is ACM Research (NASDAQ:ACMR) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 ACM Research, Inc. (NASDAQ:ACMR) makes use of debt. But the more important question is: how much risk is that debt creating?

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. 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. When we examine debt levels, we first consider both cash and debt levels, 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 March 2023 ACM Research had US$77.4m of debt, an increase on US$34.4m, over one year. However, it does have US$276.1m in cash offsetting this, leading to net cash of US$198.8m.

How Healthy Is ACM Research's Balance Sheet?

The latest balance sheet data shows that ACM Research had liabilities of US$450.2m due within a year, and liabilities of US$29.8m falling due after that. Offsetting this, it had US$276.1m in cash and US$222.3m in receivables that were due within 12 months. So it can boast US$18.4m more liquid assets than total liabilities.

This surplus suggests that ACM Research has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, ACM Research boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that ACM Research grew its EBIT by 198% over twelve months. 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$198.8m, as well as more liquid assets than liabilities. And we liked the look of last year's 198% year-on-year EBIT growth. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with ACM Research .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.