Ciena (NYSE:CIEN) Has A Pretty Healthy Balance Sheet
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Ciena Corporation (NYSE:CIEN) does carry debt. But the real question is whether this debt is making the company risky.
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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Ciena
What Is Ciena's Net Debt?
As you can see below, at the end of January 2022, Ciena had US$1.08b of debt, up from US$708.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$1.58b in cash, so it actually has US$496.0m net cash.
How Strong Is Ciena's Balance Sheet?
We can see from the most recent balance sheet that Ciena had liabilities of US$760.3m falling due within a year, and liabilities of US$1.33b due beyond that. Offsetting this, it had US$1.58b in cash and US$924.2m in receivables that were due within 12 months. So it can boast US$417.6m more liquid assets than total liabilities.
This surplus suggests that Ciena has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Ciena has more cash than debt is arguably a good indication that it can manage its debt safely.
On the other hand, Ciena saw its EBIT drop by 8.5% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Ciena'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. Ciena 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. During the last three years, Ciena generated free cash flow amounting to a very robust 85% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.
Summing up
While it is always sensible to investigate a company's debt, in this case Ciena has US$496.0m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$410m, being 85% of its EBIT. So is Ciena's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Ciena is showing 1 warning sign in our investment analysis , you should know about...
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
