Stock Analysis

Here's Why Amkor Technology (NASDAQ:AMKR) Can Manage Its Debt Responsibly

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Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that Amkor Technology, Inc. (NASDAQ:AMKR) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Amkor Technology

What Is Amkor Technology's Net Debt?

As you can see below, at the end of December 2022, Amkor Technology had US$1.23b of debt, up from US$1.14b a year ago. Click the image for more detail. However, it does have US$1.24b in cash offsetting this, leading to net cash of US$8.70m.

NasdaqGS:AMKR Debt to Equity History April 11th 2023

A Look At Amkor Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that Amkor Technology had liabilities of US$1.66b due within 12 months and liabilities of US$1.46b due beyond that. Offsetting these obligations, it had cash of US$1.24b as well as receivables valued at US$1.37b due within 12 months. So it has liabilities totalling US$515.5m more than its cash and near-term receivables, combined.

Since publicly traded Amkor Technology shares are worth a total of US$6.00b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Amkor Technology also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that Amkor Technology grew its EBIT at 17% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Amkor Technology can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Amkor Technology 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. In the last three years, Amkor Technology's free cash flow amounted to 35% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

We could understand if investors are concerned about Amkor Technology's liabilities, but we can be reassured by the fact it has has net cash of US$8.70m. And it impressed us with its EBIT growth of 17% over the last year. So we don't have any problem with Amkor Technology's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Amkor Technology (including 1 which is a bit concerning) .

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.

Valuation is complex, but we're helping make it simple.

Find out whether Amkor Technology is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.