I like to keep a close eye on the developments of the technology industry. Sometimes, I come across interesting investment options, like Advanced Micro Devices (NASDAQ:AMD). Although I take many aspects into account when I analyze a company, I will focus, in this article, on debt and liabilities. This company has been in the market for a decade, dedicated to designing and producing microprocessors and low-power processor solutions for the computer and electronics industry.
As Intel Corporation (NASDAQ:INTC)’s low-cost alternative, this company has been struggling to gain a substantial market share and the struggle will likely continue in the future. However, the underdog’s superior graphics technology has given it a differential value. Furthermore, the company is set on entering the embedded and semicustom processor market, in order to diversify revenue income. Microsoft Corporation (NASDAQ:MSFT)’s Xbox One and Sony Corporation (ADR) (NYSE:SNE)’s PlayStation 4 game consoles, for example, already feature the company’s semicustom processors.
In this article I will look into Advanced Micro Devices' total debt, total liabilities and debt ratios, as well as examine what analysts and other investment gurus think about this company. This analysis will allow us to appreciate how leveraged the company is, and what kind of returns to expect for a long-term investment. Furthermore, by taking a close look into the debt scheme of this company, we will be able to elucidate if it’s likely to maintain its capital and use it for future growth.
Total Debt to Total Assets Ratio
This metric is used to measure a company's financial risk by determining how much of the company's assets have been financed by debt. It results from adding short-term and long-term debt and then dividing this figure by the company's total assets. If the outcome is higher than 1, it means that a company´s total debt surpasses the value of its total assets. A debt ratio smaller than 1, on the other hand indicates that a company’s assets are worth more than its total debt.
Advanced Micro Devices' total debt to total assets ratio has increased over the past three years from 0.48 to 0.51. This indicates that since 2010, the firm has added more total debt value than total asset, which is worrisome. However, as this figure is currently well below 1x (0.51), the company only faces low financial risk.
- Warning! GuruFocus has detected 2 Warning Signs with AMD. Click here to check it out.
- AMD 15-Year Financial Data
- The intrinsic value of AMD
- Peter Lynch Chart of AMD
Debt ratio = Total Liabilities / Total Assets
This ratio shows the proportion of a company's assets that is financed through debt. If the ratio is less than 0.5, most of the company's assets are financed through equity and if it’s greater than 0.5, the company's assets are financed through debt. Companies with high debt/asset ratios are said to be "highly leveraged", and if creditors start to demand repayment of debt they could face serious trouble.
When looking at Advanced Micro Devices' debt ratio over the past three years, we can see that it has, in fact, increased from 0.79 to 0.86, meaning that the company has been financing most of its assets through debt. The pronouncement of this negative trend makes an investment in the firm a much bigger risk than years ago.
Debt-to-Equity Ratio = Total Liabilities / Shareholders' Equity
This is a measurement of how much suppliers, lenders, creditors and obligators have committed to the company, in comparison to what the shareholders have committed. A high debt-to-equity ratio generally means that a company has been aggressive in financing its growth with debt, which can result in reports of volatile earnings. It also indicates if a company is not able to generate enough cash to satisfy its debt obligations, making it a riskier investment.
Advanced Micro Devices' debt-to-equity ratio has escalated from 3.90 in 2011 to 6.43 in 2013, indicating that shareholders have invested more than suppliers, lenders, creditors and obligators. This moreover implies a high risk for the company and its stockholders.
Management and acquisitions
What’s important to keep in mind when looking at a company’s debt levels is recent acquisitions, as well as changes in the firm’s management structure. In this case, the assignment of Rory Read as the new CEO in 2011 brought on some changes. Apart from dividing the position of CEO from the chairman post, Read also brought on the purchase of SeaMicro in March 2013. The $334 million acquisition was a bold move for Advanced Micro Devices, which will allow the company to enter the fast-growing micro-server market.
Capitalization Ratio = LT Debt / LT Debt + Shareholders' Equity
(LT Debt = Long-Term Debt)
The capitalization ratio tells investors the extent to which the company is using its equity to support operations and growth, in addition to helping in risk assessment. A high capitalization ratio is considered to be risky because if the company fails to repay its debt on time, jeopardy of insolvency increases.
Over the past three years, Advanced Micro Devices' capitalization ratio has increased, from 0.68 in 2011 to 0.79 in 2013. This implies that the company has had less equity to support its operations and add growth. As the ratio increases, so does the risk for the company, but at the current 0.79 ratio, financial risk is moderate.
It is important to know that both Julian Robertson (Trades, Portfolio) and Charles Brandes (Trades, Portfolio) invested in the stock in the past quarter at an average price of $3.54. I think that investors should track hedge fund holdings every quarter.
Currently, many analysts have a good outlook for Advanced Micro Devices. The Yahoo! Finance team expects the company to retrieve EPS of $0.13 for FY 2013 and an EPS of $0.14 for FY 2014. Analysts at Bloomberg are estimating revenue to be at $5.73B million for FY 2013 and $5.85B million for FY 2014, marking very slow future growth.
While Advanced Micro Devices shows promise in terms on technological developments and tapping into new markets, it remains unclear whether this expansion will be successful or not. With Intel as the main industry rival, the company will have to invest in further acquisitions in order to boost its scale. However, the current balance sheet clearly shows moderate debt levels, with negative cash flow trends over the past three years. With non-existent shareholder returns or dividend yield, I believe it would be unwise for investors to commit to this company, as profits are not likely to spike significantly in the future five-year period.
Disclosure: Vanina Egea holds no position in any stocks mentioned