Yahoo Finance Lam Research (NASDAQ:LRCX) Seems To Use Debt Rather Sparingly
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.' 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 can see that Lam Research Corporation (NASDAQ:LRCX) does use debt in its business. 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, 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.
See our latest analysis for Lam Research
What Is Lam Research's Net Debt?
As you can see below, at the end of December 2020, Lam Research had US$5.78b of debt, up from US$4.41b a year ago. Click the image for more detail. However, it does have US$6.04b in cash offsetting this, leading to net cash of US$261.4m.
How Strong Is Lam Research's Balance Sheet?
The latest balance sheet data shows that Lam Research had liabilities of US$3.59b due within a year, and liabilities of US$6.28b falling due after that. On the other hand, it had cash of US$6.04b and US$2.90b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$924.7m.
This state of affairs indicates that Lam Research's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$85.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Lam Research also has more cash than debt, so we're pretty confident it can manage its debt safely.
On top of that, Lam Research grew its EBIT by 42% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Lam Research 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, a company can only pay off debt with cold hard cash, not accounting profits. Lam Research 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. During the last three years, Lam Research generated free cash flow amounting to a very robust 82% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.
Summing up
While it is always sensible to look at a company's total liabilities, it is very reassuring that Lam Research has US$261.4m in net cash. And it impressed us with free cash flow of US$2.1b, being 82% 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Lam Research is showing 3 warning signs in our investment analysis , you should know about...
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.
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.
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