Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, AudioCodes Ltd. (NASDAQ:AUDC) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. 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.
What Is AudioCodes's Net Debt?
The image below, which you can click on for greater detail, shows that AudioCodes had debt of US$4.93m at the end of June 2019, a reduction from US$7.45m over a year. But it also has US$67.8m in cash to offset that, meaning it has US$62.9m net cash.
How Strong Is AudioCodes's Balance Sheet?
The latest balance sheet data shows that AudioCodes had liabilities of US$74.2m due within a year, and liabilities of US$56.0m falling due after that. Offsetting this, it had US$67.8m in cash and US$30.4m in receivables that were due within 12 months. So it has liabilities totalling US$31.9m more than its cash and near-term receivables, combined.
Of course, AudioCodes has a market capitalization of US$512.9m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, AudioCodes boasts net cash, so it's fair to say it does not have a heavy debt load!
In addition to that, we're happy to report that AudioCodes has boosted its EBIT by 69%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine AudioCodes's ability to maintain a healthy balance sheet going forward. 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. AudioCodes 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, AudioCodes 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 AudioCodes's liabilities, but we can be reassured by the fact it has has net cash of US$63m. The cherry on top was that in converted 162% of that EBIT to free cash flow, bringing in US$30m. So we don't think AudioCodes's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in AudioCodes, you may well want to click here to check an interactive graph of its earnings per share history.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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