David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see thatAdvanced Micro Devices, Inc.(NASDAQ:AMD) does use debt in its business. But should shareholders be worried about its use of debt?
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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Advanced Micro Devices
How Much Debt Does Advanced Micro Devices Carry?
The image below, which you can click on for greater detail, shows that at March 2022 Advanced Micro Devices had debt of US$1.79b, up from US$313.0m in one year. However, its balance sheet shows it holds US$6.53b in cash, so it actually has US$4.75b net cash.
The latest balance sheet data shows that Advanced Micro Devices had liabilities of US$5.58b due within a year, and liabilities of US$6.00b falling due after that. Offsetting this, it had US$6.53b in cash and US$3.68b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.37b.
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 while it's hard to imagine that the US$153.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Advanced Micro Devices boasts net cash, so it's fair to say it does not have a heavy debt load!
Better yet, Advanced Micro Devices grew its EBIT by 113% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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 Advanced Micro Devices can strengthen its balance sheet over time.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Advanced Micro Devices 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. Over the last three years, Advanced Micro Devices recorded free cash flow worth a fulsome 83% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.
Summing up
While it is always sensible to look at a company's total liabilities, it is very reassuring that Advanced Micro Devices has US$4.75b in net cash. And it impressed us with free cash flow of US$3.3b, being 83% of its EBIT. So is Advanced Micro Devices's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot.$AMD(AMD)$
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