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Is AudioCodes (NASDAQ:AUDC) Using Too Much Debt?

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Simply Wall St
·4 min read
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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, AudioCodes Ltd. (NASDAQ:AUDC) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for AudioCodes

How Much Debt Does AudioCodes Carry?

As you can see below, AudioCodes had US$1.83m of debt at September 2020, down from US$4.27m a year prior. But on the other hand it also has US$143.6m in cash, leading to a US$141.8m net cash position.

debt-equity-history-analysis
debt-equity-history-analysis

How Healthy Is AudioCodes's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that AudioCodes had liabilities of US$89.2m due within 12 months and liabilities of US$60.5m due beyond that. On the other hand, it had cash of US$143.6m and US$39.9m worth of receivables due within a year. So it actually has US$33.8m more liquid assets than total liabilities.

This surplus suggests that AudioCodes has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, AudioCodes boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, AudioCodes grew its EBIT by 49% 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 AudioCodes 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. While AudioCodes has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, AudioCodes actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that AudioCodes has net cash of US$141.8m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$29m, being 117% of its EBIT. So we don't think AudioCodes's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for AudioCodes that you should be aware of before investing here.

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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.