Applied Materials (NASDAQ:AMAT) appears to be using debt sparingly

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David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. Like many other companies Applied Materials, Inc. (NASDAQ:AMAT) uses debt. But should shareholders worry about its use of debt?

When is debt a problem?

Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, many companies use debt to finance their growth, without any negative consequences. When we look at debt levels, we first consider cash and debt levels, together.

See our latest analysis for applied materials

What is Applied Materials’ debt?

As you can see below, Applied Materials had US$5.45 billion in debt as of October 2021, which is about the same as the previous year. You can click on the graph for more details. However, his balance sheet shows that he holds $5.46 billion in cash, so he actually has $7.00 million in net cash.

NasdaqGS: AMAT’s debt-to-equity history January 29, 2022

How healthy is Applied Materials’ balance sheet?

We can see from the most recent balance sheet that Applied Materials had liabilities of US$6.34 billion due in one year, and liabilities of US$7.23 billion due beyond. As compensation for these obligations, it had cash of US$5.46 billion as well as receivables valued at US$5.15 billion due within 12 months. Thus, its liabilities outweigh the sum of its cash and (current) receivables by $2.97 billion.

Given that Applied Materials has a colossal market capitalization of $117.6 billion, it’s hard to believe that these liabilities pose a threat. But there are enough liabilities that we certainly recommend that shareholders continue to monitor the balance sheet in the future. Despite its notable liabilities, Applied Materials has a net cash position, so it’s fair to say that it doesn’t have heavy debt!

On top of that, we are pleased to report that Applied Materials increased its EBIT by 62%, reducing the specter of future debt repayments. There is no doubt that we learn the most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Applied Materials’ ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. Applied Materials may have net cash on the balance sheet, but it’s always interesting to see how well the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its needs and its capacity. . to manage debt. Over the past three years, Applied Materials has produced strong free cash flow equivalent to 73% of its EBIT, which is what we expected. This cold hard cash allows him to reduce his debt whenever he wants.

Summary

We can understand that investors are concerned about Applied Materials’ liabilities, but we can take comfort in the fact that it has a net cash position of $7.00 million. And we liked the look of EBIT growth of 62% YoY last year. We therefore do not believe Applied Materials’ use of debt is risky. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example – Applied Materials has 2 warning signs we think you should know.

If you are interested in investing in businesses that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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