Stock Analysis

Is Lam Research (NASDAQ:LRCX) A Risky Investment?

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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Lam Research Corporation (NASDAQ:LRCX) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Lam Research

How Much Debt Does Lam Research Carry?

The chart below, which you can click on for greater detail, shows that Lam Research had US$5.00b in debt in March 2023; about the same as the year before. But on the other hand it also has US$5.37b in cash, leading to a US$372.6m net cash position.

NasdaqGS:LRCX Debt to Equity History June 29th 2023

A Look At Lam Research's Liabilities

We can see from the most recent balance sheet that Lam Research had liabilities of US$4.44b falling due within a year, and liabilities of US$6.39b due beyond that. Offsetting this, it had US$5.37b in cash and US$3.26b in receivables that were due within 12 months. So its liabilities total US$2.20b more than the combination of its cash and short-term receivables.

Since publicly traded Lam Research shares are worth a very impressive total of US$86.3b, 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, Lam Research also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that Lam Research grew its EBIT by 13% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Lam Research's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Lam Research 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, Lam Research recorded free cash flow worth 68% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

We could understand if investors are concerned about Lam Research's liabilities, but we can be reassured by the fact it has has net cash of US$372.6m. And it impressed us with free cash flow of US$4.0b, being 68% of its EBIT. So is Lam Research's debt a risk? It doesn't seem so to us. Another factor that would give us confidence in Lam Research would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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

Find out whether Lam Research 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.