The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Lam Research Corporation (NASDAQ:LRCX) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Lam Research

How Much Debt Does Lam Research Carry?

You can click the graphic below for the historical numbers, but it shows that Lam Research had US$4.96b of debt in December 2021, down from US$5.78b, one year before. But on the other hand it also has US$5.33b in cash, leading to a US$367.5m net cash position.

How Healthy Is Lam Research's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Lam Research had liabilities of US$3.86b due within 12 months and liabilities of US$6.35b due beyond that. Offsetting these obligations, it had cash of US$5.33b as well as receivables valued at US$3.40b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.48b.

Having regard to Lam Research's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$77.4b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Lam Research also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Lam Research grew its EBIT by 53% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Lam Research can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Lam Research 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 most recent three years, Lam Research recorded free cash flow worth 77% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

We could understand if investors are concerned about Lam Research's liabilities, but we can be reassured by the fact it has has net cash of US$367.5m. And we liked the look of last year's 53% year-on-year EBIT growth. So is Lam Research's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Lam Research you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.