Does Applied Materials (NASDAQ:AMAT) Have A Healthy Balance Sheet?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Applied Materials, Inc. (NASDAQ:AMAT) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Applied Materials

What Is Applied Materials's Net Debt?

The chart below, which you can click on for greater detail, shows that Applied Materials had US$5.56b in debt in January 2024; about the same as the year before. However, it does have US$7.49b in cash offsetting this, leading to net cash of US$1.93b.

How Healthy Is Applied Materials' Balance Sheet?

The latest balance sheet data shows that Applied Materials had liabilities of US$7.08b due within a year, and liabilities of US$7.04b falling due after that. On the other hand, it had cash of US$7.49b and US$5.04b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.58b.

This state of affairs indicates that Applied Materials' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$170.3b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Applied Materials also has more cash than debt, so we're pretty confident it can manage its debt safely.

Applied Materials's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. When analysing debt levels, the balance sheet is the obvious place to start. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Over the most recent three years, Applied Materials recorded free cash flow worth 77% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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$1.93b in net cash. And it impressed us with free cash flow of US$7.7b, being 77% of its EBIT. So we don't think Applied Materials's use of debt is risky. 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. We've identified 1 warning sign with Applied Materials , and understanding them should be part of your investment process.

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.