ASML Holding (AMS:ASML) has a rock-solid balance sheet

Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Above all, ASML Holding SA (AMS:ASML) is in debt. But does this debt worry shareholders?

When is debt a problem?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. If things go really bad, lenders can take over the business. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, many companies use debt to finance their growth, without any negative consequences. When we think about a company’s use of debt, we first look at cash and debt together.

Check out our latest analysis for ASML Holding

What is ASML Holding’s debt?

As you can see below, ASML Holding had 4.41 billion euros in debt in July 2022, compared to 4.63 billion euros the previous year. However, he also had €4.40 billion in cash, so his net debt is €9.00 million.

ENXTAM: Historical Debt to Equity ASML September 10, 2022

How healthy is ASML Holding’s balance sheet?

Zooming in on the latest balance sheet data, we can see that ASML Holding had liabilities of €14.6 billion due within 12 months and liabilities of €9.63 billion due beyond. On the other hand, it had 4.40 billion euros in cash and 7.54 billion euros in receivables at less than one year. Its liabilities therefore total 12.3 billion euros more than the combination of its cash and short-term receivables.

Given that publicly traded ASML Holding shares are worth a very impressive total of €197.8 billion, it seems unlikely that this level of liabilities will pose a major threat. But there are enough liabilities that we certainly recommend that shareholders continue to monitor the balance sheet in the future. But in any case, ASML Holding has practically no net debt, so it is fair to say that it is not very indebted!

We measure a company’s leverage against its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT ) covers its interest charge (interest coverage). The advantage of this approach is that we consider both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio ).

With debt at a measly 0.0014 times EBITDA and EBIT covering 126 times interest, ASML Holding is clearly not a desperate borrower. Thus, compared to previous income, the level of indebtedness seems insignificant. And we also warmly note that ASML Holding increased its EBIT by 12% last year, which makes its debt more manageable. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether ASML Holding can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

Finally, a company can only repay its debts with cold hard cash, not with book profits. It is therefore worth checking how much of this EBIT is supported by free cash flow. Fortunately for all shareholders, ASML Holding has actually produced more free cash flow than EBIT over the past three years. This kind of high cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our point of view

The good news is that ASML Holding’s demonstrated ability to cover its interest costs with its EBIT delights us like a fluffy puppy does a toddler. And this is only the beginning of good news since its conversion of EBIT into free cash flow is also very pleasing. Overall, we do not think that ASML Holding is taking bad risks, as its debt seems modest to us. So we are not worried about using a little leverage on the balance sheet. Another factor that would give us confidence in ASML Holding would be if insiders bought shares: if you are also aware of this signal, you can discover it instantly by clicking on this link.

If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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