These 4 Measures Indicate That Advanced Micro Devices (NASDAQ:AMD) Is Using Debt Safely

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Advanced Micro Devices, Inc. (NASDAQ:AMD) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Advanced Micro Devices

What Is Advanced Micro Devices's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Advanced Micro Devices had US$330.0m of debt in December 2020, down from US$486.0m, one year before. However, its balance sheet shows it holds US$2.29b in cash, so it actually has US$1.96b net cash.

A Look At Advanced Micro Devices' Liabilities

According to the last reported balance sheet, Advanced Micro Devices had liabilities of US$2.42b due within 12 months, and liabilities of US$708.0m due beyond 12 months. On the other hand, it had cash of US$2.29b and US$2.08b worth of receivables due within a year. So it actually has US$1.24b more liquid assets than total liabilities.

This state of affairs indicates that Advanced Micro Devices' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$98.4b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Advanced Micro Devices has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Advanced Micro Devices grew its EBIT by 118% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Advanced Micro Devices's ability to maintain a healthy balance sheet going forward. 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 Advanced Micro Devices 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. In the last three years, Advanced Micro Devices's free cash flow amounted to 38% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to investigate a company's debt, in this case Advanced Micro Devices has US$1.96b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 118% over the last year. So we don't think Advanced Micro Devices'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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Advanced Micro Devices (of which 1 shouldn't be ignored!) you should know about.

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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