These 4 Measures Indicate That ACM Research (NASDAQ:ACMR) Is Using Debt Reasonably Well

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

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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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does ACM Research Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 ACM Research had US$182.8m of debt, an increase on US$92.1m, over one year. However, its balance sheet shows it holds US$444.1m in cash, so it actually has US$261.3m net cash.

How Healthy Is ACM Research's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ACM Research had liabilities of US$641.2m due within 12 months and liabilities of US$118.6m due beyond that. Offsetting these obligations, it had cash of US$444.1m as well as receivables valued at US$428.9m due within 12 months. So it can boast US$113.2m 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.

Check out our latest analysis for ACM Research

In addition to that, we're happy to report that ACM Research has boosted its EBIT by 58%, 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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 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$261.3m, as well as more liquid assets than liabilities. And we liked the look of last year's 58% 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. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with ACM Research .

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.