There are a number of reasons that attract investors towards large-cap companies such as Advanced Micro Devices Inc (NASDAQ:AMD), with a market cap of US$16.4b. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. However, the key to their continued success lies in its financial health. This article will examine Advanced Micro Devices’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into AMD here.
Does AMD produce enough cash relative to debt?
Over the past year, AMD has reduced its debt from US$1.4b to US$1.3b , which comprises of short- and long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at US$1.1b for investing into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can take a look at some of AMD’s operating efficiency ratios such as ROA here.
Can AMD meet its short-term obligations with the cash in hand?
Looking at AMD’s most recent US$1.9b liabilities, the company has been able to meet these obligations given the level of current assets of US$3.3b, with a current ratio of 1.76x. For Semiconductor companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can AMD service its debt comfortably?
Since equity is smaller than total debt levels, Advanced Micro Devices is considered to have high leverage. This is common amongst large-cap companies because debt can often be a less expensive alternative to equity due to tax deductibility of interest payments. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. The sustainability of AMD’s debt levels can be assessed by comparing the company’s interest payments to earnings. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. For AMD, the ratio of 4.26x suggests that interest is appropriately covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes AMD and other large-cap investments thought to be safe.
AMD’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Though, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how AMD has been performing in the past. I suggest you continue to research Advanced Micro Devices to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AMD’s future growth? Take a look at our free research report of analyst consensus for AMD’s outlook.
- Valuation: What is AMD worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether AMD is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.