Applied Materials (NASDAQ:AMAT) Has A Rock Solid Balance Sheet

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.' 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 the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Applied Materials

How Much Debt Does Applied Materials Carry?

As you can see below, at the end of July 2024, Applied Materials had US$6.26b of debt, up from US$5.66b a year ago. Click the image for more detail. But on the other hand it also has US$9.10b in cash, leading to a US$2.85b net cash position.

How Healthy Is Applied Materials' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Applied Materials had liabilities of US$7.23b due within 12 months and liabilities of US$7.58b due beyond that. Offsetting these obligations, it had cash of US$9.10b as well as receivables valued at US$4.97b due within 12 months. So it has liabilities totalling US$734.0m more than its cash and near-term receivables, combined.

Having regard to Applied Materials' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$155.4b company is struggling for cash, we still think it's worth monitoring its 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!

While Applied Materials doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Applied Materials 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. Applied Materials 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 most recent three years, Applied Materials recorded free cash flow worth 79% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

We could understand if investors are concerned about Applied Materials's liabilities, but we can be reassured by the fact it has has net cash of US$2.85b. The cherry on top was that in converted 79% of that EBIT to free cash flow, bringing in US$6.6b. So we don't think Applied Materials's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Applied Materials has 1 warning sign we think you should be aware of.

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.