AMD Inc Stock Carries A High Bankruptcy Risk For Now

  • Shares of Advanced Micro Devices, Inc seemed to have bottomed out for now.
  • In the long run, AMD's proposed debt restructuring will aid the company's financial health.
  • The AMD stock still carries a significant bankruptcy risk.

Shares of Sunnyvale, California-based Advanced Micro Devices, Inc. (NASDAQ:AMD) have generated fabulous returns for investors over the last twelve months, gaining by nearly 200%. With the shares now down about 25% from its peak, investors who have been sitting on the sidelines might be tempted to get in. Even more so, given the positive impact of AMD's proposed debt restructuring. While AMD shares appear to have bottomed out for now, conservative investors would do well to stay away. AMD shares still carry a substantial bankruptcy risk. Here's why.

Quantifying The Risk

Often, subjectivity clouds our assessment of risk. So, let's take an objective approach, since there is one. To begin with, let's look at the value of what you own if you buy AMD shares.

Shareholders' Equity And Why It Matters

The value of shareholders' equity represents the amount that would be returned to shareholders after all the company's assets have been sold, and lenders repaid, in the event of a bankruptcy. A negative shareholders' equity value means that equity investors get nothing. They have no residual claim.

Until a few days ago, AMD's shareholders' equity value stood at a negative $413 million. Now that AMD has raised $600 million ($580 million net of expenses) worth of equity, the value of that residual claim amounts to $103 million.

Now, AMD has 895 million shares, implying a residual value of 11 cents a share that costs $6. That stands in contrast to a residual value of $13 a share for a ~$36 Intel share. That's not to say that Intel is a great investment based on that figure alone. The comparison is made purely to illustrate the greater degree of safety investors enjoy when investing in financially stable companies.

Also Read: AMD Stock Could Explode If Vega GPUs Arrive In 2016

Of course, the risk/reward is likely to be very different. Shares of a company like AMD are likely to react much more to positive triggers, which is something the near 200% rally over 1 year illustrates. But to really understand the degree of risk and likelihood of bankruptcy, the Altman Z-Score is one of the tools investors can use.

Quantifying The Risk Of Bankruptcy

The Altman Z-Score is a credit strength test that's tailor made for this situation. The Altman Z-Score is a test that investors can use to assess the likelihood of bankruptcy for a publicly listed manufacturing company, and factors in aspects like profitability, leverage, liquidity and solvency.

To arrive at the Z-score, one needs to calculate 5 business ratios, which are then assigned predefined weights and summed up to arrive at the final score. These 5 ratios and their weights were identified and predefined by NYU Stern Finance Professor Edward Altman back in 1967, based on his study of patterns with bankrupt firms.

A company with a score of 3 or above is considered to be in the safe zone, while a company with a score of less than 1.8 is seen as one that's probably headed for bankruptcy.

The formula is, Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E, where A to E represent the 5 business ratios and their coefficients represent the weights.

The 5 business ratios are as follows:

A = working capital/total assets

B = retained earnings/total assets

C = earnings before interest and tax (EBIT)/total assets

D = market value of equity or market cap/total liabilities

E = sales/total assets

All the data required is available in AMD's last 4 10-Q filings, so all you have to do is find these numbers in AMD's SEC filings. I've used trailing twelve months figures for EBIT and sales. The numbers we need are as follows.

AMD Financials $ - Billions
AMD Working Capital (Current Assets - Current Liabilities) 0.93
AMD Total Assets 3.32
AMD Retained Earnings -7.35
AMD EBIT (TTM) -0.28
AMD Market Cap 5.21
AMD Debt (short and long term)* 3.15
AMD Sales (TTM) 3.88

*Assuming $580 million worth of equity is used for repayment of debt

Based on these numbers, AMD's Altman Z-score stands at -0.89. That's an improvement over a score of -1.04 prior to the fund raising and proposed debt restructuring. But it's evident that AMD shares still carry a high bankruptcy risk.

For the sake of illustration, Intel's Altman Z-score is 3.61. Again, that's not to say that Intel is a good stock to buy based on this one number alone. Rather, the Altman Z-score is a useful tool that tells you what NOT to buy. It's a filter investors could use to eliminate options.

Also Read: Does A Revamped Nvidia Corporation Spell Trouble For AMD?

There's no element of subjectivity here, which has its advantages and disadvantages, because stocks are also driven by qualitative aspects that impact the company. However, it's clear that the AMD stock is not a good investment option for conservative investors. At least for now.

Summing It Up

The AMD stock has generated superb returns for investors over the last one year, gaining by nearly 200%. Investors who have missed out on the rally might be tempted to consider buying the stock, now that it has seen a sizeable correction of about 25%. Even more so, given the positive impact of AMD's proposed debt restructuring.

Shares of AMD seem to have bottomed out for now. However, conservative investors would do well to avoid the stock for now, given the significant bankruptcy risk it still carries.

Vikram Nagarkar Vikram Nagarkar   on Amigobulls :

Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice.

Buying and selling of securities carries the risk of monetary losses.Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions.

Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

show more

Comments on this article and AMD stock

The Z-score is based on past financial performance. AMD's margins will be five points higher 6-9 months from now.

Any company that declares bankruptcy will leave pretty much nothing for the stockholders. In five years, should Intel declare bankruptcy, their "residual value" would be similar to AMD's current residual value. Losses over time destroy equity that is what leads to bankruptcy. Looking at AMD while they are in their trough while looking at Intel at it's peak is disingenuous, at best, and moronic, at worst.
11 6 reply
user profile picture
Hi, thanks for reading, and for sharing your thoughts. Please note that the article also says:

"That's not to say that Intel is a great investment based on that figure alone. The comparison is made purely to illustrate the greater degree of safety investors enjoy when investing in financially stable companies."

Also, if you're aware of a metric or measure that doesn't focus on "past financial performance", and instead measures "future" performance, we'd be thrilled to hear about it. :-)
7 4
Do share this awesome post