Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Amkor Technology, Inc. (NASDAQ:AMKR) makes use of debt. But should shareholders be worried about its use of debt?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 think about a company's use of debt, we first look at cash and debt together.
What Is Amkor Technology's Net Debt?
As you can see below, Amkor Technology had US$1.10b of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds US$1.55b in cash, so it actually has US$441.7m net cash.
How Strong Is Amkor Technology's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Amkor Technology had liabilities of US$1.51b due within 12 months and liabilities of US$1.28b due beyond that. On the other hand, it had cash of US$1.55b and US$1.15b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$88.8m.
Having regard to Amkor Technology's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$8.11b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Amkor Technology boasts net cash, so it's fair to say it does not have a heavy debt load!
It is just as well that Amkor Technology's load is not too heavy, because its EBIT was down 30% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Amkor Technology can strengthen its balance sheet over time. 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 Amkor Technology 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. In the last three years, Amkor Technology's free cash flow amounted to 50% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
Summing Up
We could understand if investors are concerned about Amkor Technology's liabilities, but we can be reassured by the fact it has has net cash of US$441.7m. So we are not troubled with Amkor Technology's debt use. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Amkor Technology insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
