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Amkor Technology, Inc. (NASDAQ:AMKR) is a small-cap stock with a market capitalization of US$1.8b. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Evaluating financial health as part of your investment thesis is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, this is just a partial view of the stock, and I recommend you dig deeper yourself into AMKR here.
AMKR’s Debt (And Cash Flows)
AMKR's debt levels surged from US$1.3b to US$2.0b over the last 12 months , which includes long-term debt. With this increase in debt, the current cash and short-term investment levels stands at US$1.1b to keep the business going. On top of this, AMKR has produced US$568m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 29%, indicating that AMKR’s debt is appropriately covered by operating cash.
Can AMKR pay its short-term liabilities?
Looking at AMKR’s US$1.5b in current liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.36x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Semiconductor companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Does AMKR face the risk of succumbing to its debt-load?
With total debt exceeding equity, AMKR is considered a highly levered company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if AMKR’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For AMKR, the ratio of 3.26x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving AMKR ample headroom to grow its debt facilities.
Although AMKR’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around AMKR's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure AMKR has company-specific issues impacting its capital structure decisions. I suggest you continue to research Amkor Technology to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AMKR’s future growth? Take a look at our free research report of analyst consensus for AMKR’s outlook.
- Historical Performance: What has AMKR's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Thank you for reading.