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

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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that AudioCodes Ltd. (NASDAQ:AUDC) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for AudioCodes

What Is AudioCodes's Debt?

The image below, which you can click on for greater detail, shows that AudioCodes had debt of US$3.04m at the end of March 2020, a reduction from US$5.53m over a year. But on the other hand it also has US$73.6m in cash, leading to a US$70.6m net cash position.

NasdaqGS:AUDC Historical Debt May 21st 2020
NasdaqGS:AUDC Historical Debt May 21st 2020

A Look At AudioCodes's Liabilities

The latest balance sheet data shows that AudioCodes had liabilities of US$84.6m due within a year, and liabilities of US$61.0m falling due after that. Offsetting these obligations, it had cash of US$73.6m as well as receivables valued at US$34.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$37.1m.

Of course, AudioCodes has a market capitalization of US$1.06b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, AudioCodes also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, AudioCodes grew its EBIT by 34% 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're focused on the future you can check out this free report showing analyst profit forecasts.

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. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that AudioCodes has US$70.6m in net cash. And it impressed us with free cash flow of US$20m, being 128% of its EBIT. So we don't think AudioCodes's use of debt is risky. 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 4 warning signs for AudioCodes 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. 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. Thank you for reading.