Is Advanced Micro Devices (NASDAQ:AMD) Using Too Much Debt?

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Simply Wall St

Sun, Jan 2, 2022, 4:37 AM 4 min read

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. Importantly, Advanced Micro Devices, Inc. (NASDAQ:AMD) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Advanced Micro Devices

How Much Debt Does Advanced Micro Devices Carry?

You can click the graphic below for the historical numbers, but it shows that Advanced Micro Devices had US$313.0m of debt in September 2021, down from US$373.0m, one year before. But on the other hand it also has US$3.61b in cash, leading to a US$3.30b net cash position.

debt-equity-history-analysis — NasdaqGS:AMD Debt to Equity History January 2nd 2022

How Strong Is Advanced Micro Devices' Balance Sheet?

According to the last reported balance sheet, Advanced Micro Devices had liabilities of US$3.56b due within 12 months, and liabilities of US$453.0m due beyond 12 months. On the other hand, it had cash of US$3.61b and US$2.23b worth of receivables due within a year. So it actually has US$1.82b 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 while it's hard to imagine that the US$173.8b company is struggling for cash, we still think it's worth monitoring its 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.

Even more impressive was the fact that Advanced Micro Devices grew its EBIT by 166% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Advanced Micro Devices can strengthen its balance sheet over time. 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. During the last three years, Advanced Micro Devices produced sturdy free cash flow equating to 80% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case Advanced Micro Devices has US$3.30b in net cash and a decent-looking balance sheet. And we liked the look of last year's 166% year-on-year EBIT growth. 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. For example Advanced Micro Devices has 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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.

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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.