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Has ASML Holding N.V. (AMS:ASML) Got Enough Cash?

Simply Wall St

ASML Holding N.V. (AMS:ASML), a large-cap worth €73b, comes to mind for investors seeking a strong and reliable stock investment. Most investors favour these big stocks due to their strong balance sheet and high market liquidity, meaning there are an abundance of stock in the public market available for trading. These companies are resilient in times of low liquidity and are not as strongly impacted by interest rate hikes as companies with lots of debt. Today I will analyse the latest financial data for ASML to determine is solvency and liquidity and whether the stock is a sound investment.

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View our latest analysis for ASML Holding

ASML’s Debt (And Cash Flows)

ASML has sustained its debt level by about €3.1b over the last 12 months – this includes long-term debt. At this current level of debt, the current cash and short-term investment levels stands at €3.3b to keep the business going. On top of this, ASML has generated €2.4b in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 78%, indicating that ASML’s operating cash is sufficient to cover its debt.

Can ASML meet its short-term obligations with the cash in hand?

Looking at ASML’s €3.7b in current liabilities, it appears that the company has been able to meet these commitments with a current assets level of €10b, leading to a 2.79x current account ratio. The current ratio is calculated by dividing 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.

ENXTAM:ASML Historical Debt, May 23rd 2019

Can ASML service its debt comfortably?

With a debt-to-equity ratio of 26%, ASML's debt level may be seen as prudent. ASML is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if ASML’s debt levels are sustainable by measuring interest payments against earnings of a company. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. For ASML, the ratio of 103x suggests that interest is amply covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes ASML and other large-cap investments thought to be safe.

Next Steps:

ASML has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Furthermore, the company exhibits an ability to meet its near-term obligations, which isn't a big surprise for a large-cap. This is only a rough assessment of financial health, and I'm sure ASML has company-specific issues impacting its capital structure decisions. You should continue to research ASML Holding to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for ASML’s future growth? Take a look at our free research report of analyst consensus for ASML’s outlook.
  2. Valuation: What is ASML worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether ASML is currently mispriced by the market.
  3. 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 editorial-team@simplywallst.com. 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.