Applied Materials (NASDAQ:AMAT) Could Easily Take On More Debt

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.' 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. We can see that Applied Materials, Inc. (NASDAQ:AMAT) does use debt in its business. But should shareholders be worried about its use of debt?

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Applied Materials Carry?

As you can see below, at the end of April 2025, Applied Materials had US$6.26b of debt, up from US$5.56b a year ago. Click the image for more detail. However, its balance sheet shows it holds US$6.75b in cash, so it actually has US$486.0m net cash.

A Look At Applied Materials' Liabilities

The latest balance sheet data shows that Applied Materials had liabilities of US$8.00b due within a year, and liabilities of US$6.68b falling due after that. On the other hand, it had cash of US$6.75b and US$6.19b worth of receivables due within a year. So its liabilities total US$1.74b more than the combination of its cash and short-term receivables.

Having regard to Applied Materials' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$153.3b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Applied Materials boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Applied Materials

Fortunately, Applied Materials grew its EBIT by 8.9% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Applied Materials'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. While Applied Materials 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, Applied Materials produced sturdy free cash flow equating to 78% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Applied Materials has US$486.0m in net cash. The cherry on top was that in converted 78% of that EBIT to free cash flow, bringing in US$5.9b. So we don't think Applied Materials's use of debt is risky. We'd be very excited to see if Applied Materials insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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.

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.