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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Amazon.com, Inc. (NASDAQ:AMZN) does carry debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Amazon.com Carry?
You can click the graphic below for the historical numbers, but it shows that as of December 2020 Amazon.com had US$33.7b of debt, an increase on US$24.7b, over one year. But it also has US$84.4b in cash to offset that, meaning it has US$50.7b net cash.
How Strong Is Amazon.com's Balance Sheet?
The latest balance sheet data shows that Amazon.com had liabilities of US$126.4b due within a year, and liabilities of US$101.4b falling due after that. Offsetting this, it had US$84.4b in cash and US$24.3b in receivables that were due within 12 months. So it has liabilities totalling US$119.1b more than its cash and near-term receivables, combined.
Given Amazon.com has a humongous market capitalization of US$1.65t, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Amazon.com boasts net cash, so it's fair to say it does not have a heavy debt load!
On top of that, Amazon.com grew its EBIT by 59% over the last twelve months, and that growth will make it easier to handle its debt. 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 Amazon.com can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Amazon.com may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Amazon.com actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
We could understand if investors are concerned about Amazon.com's liabilities, but we can be reassured by the fact it has has net cash of US$50.7b. And it impressed us with free cash flow of US$26b, being 130% of its EBIT. So we don't think Amazon.com's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Amazon.com's earnings per share history for free.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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