Is Amkor Technology (NASDAQ:AMKR) Using Too Much Debt?

Is Amkor Technology (NASDAQ:AMKR) Using Too Much Debt? Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Amkor Technology, Inc. (NASDAQ:AMKR) does use debt in its business. But the real question is whether this debt is making the company risky. When Is Debt Dangerous? Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together. Check out our latest analysis for Amkor Technology What Is Amkor Technology's Debt? As you can see below, Amkor Technology had US$1.03b of debt, at March 2021, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$952.4m in cash offsetting this, leading to net debt of about US$79.8m. NasdaqGS:AMKR Debt to Equity History May 10th 2021 How Healthy Is Amkor Technology's Balance Sheet? We can see from the most recent balance sheet that Amkor Technology had liabilities of US$1.58b falling due within a year, and liabilities of US$618.6m due beyond that. On the other hand, it had cash of US$952.4m and US$590.5m worth of receivables due within a year. So it has liabilities totalling US$655.1m more than its cash and near-term receivables, combined. This deficit isn't so bad because Amkor Technology is worth US$4.51b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While Amkor Technology's debt to EBITDA ratio (4.3) suggests that it uses some debt, its interest cover is very weak, at 1.5, suggesting high leverage. In large part that's due to the company's significant depreciation and amortisation charges, which arguably mean its EBITDA is a very generous measure of earnings, and its debt may be more of a burden than it first appears. It seems clear that the cost of borrowing money is negatively impacting returns for shareholders, of late. Shareholders should be aware that Amkor Technology's EBIT was down 72% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. 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 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. During the last three years, Amkor Technology generated free cash flow amounting to a very robust 93% 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 investigate a company's debt, in this case Amkor Technology has US$79.8m in net debt and a decent-looking balance sheet. And it also impressed with its conversion of EBIT to free cash flow, being 93% efficient at doing so. So is Amkor Technology'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. For instance, we've identified 3 warning signs for Amkor Technology (1 is potentially serious) you should be aware of. PromotedIf you're looking to trade Amkor Technology, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. 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