Is Advanced Micro Devices (NASDAQ:AMD) a risky investment?

Some argue that volatility, not debt, is the best way to think about risk as an investor, but Warren Buffett is famous for saying that “Volatility is not 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. We notice it Advanced Micro Devices, Inc. (NASDAQ:AMD) does indeed have debt on its balance sheet. But does this debt worry shareholders?

Why is debt risky?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. In the worst case scenario, the company may go bankrupt if it is unable to repay its creditors. However, a more typical (but still expensive) situation is where a company must dilute shareholders at a low share price simply to get debt under control. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. The first thing to do when considering how much debt a company uses is to look at cash and debt together.

Check out our latest analysis for Advanced Micro Devices

How much debt do advanced micro devices have?

The chart below, which you can click on for more details, shows that Advanced Micro Devices had $2.47 billion in debt as of March 2024; approximately the same as the year before. However, its balance sheet shows it has US$6.04b in cash, so it actually has US$3.57b in net cash.

How healthy is Advanced Micro Devices’ balance sheet?

Zooming in on the latest balance sheet data, we can see that Advanced Micro Devices had liabilities of US$6.47b due within 12 months and liabilities of US$5.22b due beyond that. On the other hand, it had US$6.04b in cash and US$5.07b in receivables due within a year. So its liabilities total US$593.0m more than the combination of its cash and short-term receivables.

Given Advanced Micro Devices’ size, it appears that its liquid assets are well balanced with its total liabilities. So while it’s hard to imagine that the US$277.4b company is struggling for cash, we still think it’s worth monitoring its balance sheet. While Advanced Micro Devices has liabilities worth noting, it also has more cash than debt, so we’re confident it will be able to manage its debt safely.

Even more impressive was the fact that Advanced Micro Devices increased its EBIT by 203% in twelve months. Thanks to this support, repaying debt in the future will be even easier. The balance sheet is undoubtedly an area to focus on when analyzing debt. Ultimately, however, the future profitability of the company will determine whether 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.

The story continues

Finally, a company can only pay off debt with cold, hard cash, not accounting profits. Advanced Micro Devices may have net cash on its balance sheet, but it’s still interesting to look at how well the company converts its earnings before interest and tax (EBIT) to free cash flow, as this will impact both its needs and its ability to debt management. Over the last three years, Advanced Micro Devices actually generated more free cash flow than EBIT. This kind of strong cash conversion excites us as much as the audience does when the beat drops at a Daft Punk concert.

To sum up

We can understand investors’ concerns about Advanced Micro Devices’ liabilities, but we’re reassured by the fact that it has US$3.57b of net cash. It also impressed us with free cash flow of US$1.2 billion, representing 149% of EBIT. So is Advanced Micro Devices’ debt a risk? We don’t think so. When analyzing debt levels, the balance sheet is an obvious place to start. But ultimately, every company can mitigate the risks that exist beyond the balance sheet. We discovered for example 1 warning sign for Advanced Micro Devices what you should know before investing here.

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

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This article by Simply Wall St is of a general nature. We comment based on historical data and analyst forecasts, using only an unbiased methodology, and our articles are not intended to provide financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide long-term, focused analysis based on fundamental data. Please note that our analysis may not reflect the latest price-sensitive company announcements or qualitative content. Simply Wall St has no position in any of the stocks mentioned.