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

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.' 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 should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for ACM Research

What Is ACM Research's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 ACM Research had US$144.9m of debt, an increase on US$73.1m, over one year. But it also has US$370.8m in cash to offset that, meaning it has US$225.9m net cash.

How Strong Is ACM Research's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ACM Research had liabilities of US$586.2m due within 12 months and liabilities of US$80.0m due beyond that. On the other hand, it had cash of US$370.8m and US$347.2m worth of receivables due within a year. So it actually has US$51.8m 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. Simply put, the fact that ACM Research has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, ACM Research grew its EBIT by 36% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. 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.

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. 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$225.9m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 36% over the last year. So we don't have any problem with ACM Research's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for ACM Research (of which 1 is potentially serious!) you should know about.

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.