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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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, ANSYS, Inc. (NASDAQ:ANSS) does carry debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
What Is ANSYS's Net Debt?
As you can see below, at the end of March 2021, ANSYS had US$798.2m of debt, up from US$423.6m a year ago. Click the image for more detail. However, it does have US$987.9m in cash offsetting this, leading to net cash of US$189.7m.
How Strong Is ANSYS' Balance Sheet?
We can see from the most recent balance sheet that ANSYS had liabilities of US$624.0m falling due within a year, and liabilities of US$1.08b due beyond that. Offsetting these obligations, it had cash of US$987.9m as well as receivables valued at US$590.0m due within 12 months. So it has liabilities totalling US$128.1m more than its cash and near-term receivables, combined.
This state of affairs indicates that ANSYS' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$29.4b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, ANSYS boasts net cash, so it's fair to say it does not have a heavy debt load!
And we also note warmly that ANSYS grew its EBIT by 13% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if ANSYS 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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. ANSYS 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. Happily for any shareholders, ANSYS actually produced more free cash flow than EBIT over the last three years. 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 ANSYS's liabilities, but we can be reassured by the fact it has has net cash of US$189.7m. The cherry on top was that in converted 101% of that EBIT to free cash flow, bringing in US$538m. So we don't think ANSYS's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with ANSYS .
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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