Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Advanced Micro Devices Inc (NASDAQ:AMD), with a market cap of US$9.74B, often get neglected by retail investors. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. This article will examine AMD’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. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into AMD here. View our latest analysis for Advanced Micro Devices
Does AMD generate enough cash through operations?
AMD’s debt level has been constant at around US$1.40B over the previous year – this includes both the current and long-term debt. At this stable level of debt, AMD’s cash and short-term investments stands at US$1.19B , ready to deploy into the business. On top of this, AMD has produced US$68.00M in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 4.87%, indicating that AMD’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In AMD’s case, it is able to generate 0.049x cash from its debt capital.
Can AMD meet its short-term obligations with the cash in hand?
With current liabilities at US$1.49B, it seems that the business has been able to meet these obligations given the level of current assets of US$2.62B, with a current ratio of 1.76x. Usually, for Semiconductor companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does AMD face the risk of succumbing to its debt-load?
With total debt exceeding equities, AMD is considered a highly levered company. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether AMD is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In AMD’s, case, the ratio of 1.7x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
At its current level of cash flow coverage, AMD has room for improvement to better cushion for events which may require debt repayment. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure AMD has company-specific issues impacting its capital structure decisions. You should 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.