Yahoo Finance We Think ASML Holding (AMS:ASML) Can Stay On Top Of Its Debt
David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital. So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that ASML Holding N.V. (AMS:ASML) does use debt in its business. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for ASML Holding
How Much Debt Does ASML Holding Carry?
The image below, which you can click on for greater detail, shows that at December 2019 ASML Holding had debt of €2.97b, up from €3.1k in one year. However, its balance sheet shows it holds €4.72b in cash, so it actually has €1.75b net cash.
How Healthy Is ASML Holding's Balance Sheet?
We can see from the most recent balance sheet that ASML Holding had liabilities of €4.69b falling due within a year, and liabilities of €5.34b due beyond that. Offsetting these obligations, it had cash of €4.72b as well as receivables valued at €2.76b due within 12 months. So its liabilities total €2.56b more than the combination of its cash and short-term receivables.
Of course, ASML Holding has a titanic market capitalization of €109.8b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, ASML Holding boasts net cash, so it's fair to say it does not have a heavy debt load!
But the other side of the story is that ASML Holding saw its EBIT decline by 5.9% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if ASML Holding 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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. ASML Holding may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, ASML Holding recorded free cash flow worth 77% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
Summing up
We could understand if investors are concerned about ASML Holding's liabilities, but we can be reassured by the fact it has has net cash of €1.75b. And it impressed us with free cash flow of €2.4b, being 77% of its EBIT. So is ASML Holding's debt a risk? It doesn't seem so to us. We'd be motivated to research the stock further if we found out that ASML Holding insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.
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