NASDAQ:LRCX) does carry debt. But the more important question is: how much risk is that debt creating?” data-reactid=”28″ type=”text”>The external fund manager backed by Berkshire Hathaway’s Charlie Munger, Li Lu, makes no bones about it when he says ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Lam Research Corporation (NASDAQ:LRCX) does carry debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company’s use of debt, we first look at cash and debt together.
How Much Debt Does Lam Research Carry?
The image below, which you can click on for greater detail, shows that at June 2020 Lam Research had debt of US$5.80b, up from US$4.44b in one year. However, its balance sheet shows it holds US$6.71b in cash, so it actually has US$914.8m net cash.
How Strong Is Lam Research’s Balance Sheet?
The latest balance sheet data shows that Lam Research had liabilities of US$3.16b due within a year, and liabilities of US$6.22b falling due after that. Offsetting this, it had US$6.71b in cash and US$2.10b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$579.2m.
Having regard to Lam Research’s size, it seems that its liquid assets are well balanced with its total liabilities. So while it’s hard to imagine that the US$52.2b company is struggling for cash, we still think it’s worth monitoring its balance sheet. Despite its noteworthy liabilities, Lam Research boasts net cash, so it’s fair to say it does not have a heavy debt load!
report showing analyst profit forecasts.” data-reactid=”53″ type=”text”>Fortunately, Lam Research grew its EBIT by 8.3% in the last year, making that debt load look even more manageable. 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 Lam Research 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 business needs free cash flow to pay off debt; accounting profits just don’t cut it. While Lam Research 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. Over the last three years, Lam Research recorded free cash flow worth a fulsome 86% of its EBIT, which is stronger than we’d usually expect. That puts it in a very strong position to pay down debt.
3 warning signs for Lam Research you should know about.” data-reactid=”60″ type=”text”>While it is always sensible to look at a company’s total liabilities, it is very reassuring that Lam Research has US$914.8m in net cash. And it impressed us with free cash flow of US$1.9b, being 86% of its EBIT. So is Lam Research’s debt a risk? It doesn’t seem so to us. 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. Consider risks, for instance. Every company has them, and we’ve spotted 3 warning signs for Lam Research you should know about.
list of growth stocks with zero net debt 100% free, right now.” data-reactid=”61″ type=”text”>When all is said and done, sometimes its easier to focus on companies that don’t even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
This article by Simply Wall St is general in nature. 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.