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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. We can see that Vocera Communications, Inc. (NYSE:VCRA) does use debt in its business. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Vocera Communications Carry?
As you can see below, at the end of September 2021, Vocera Communications had US$258.7m of debt, up from US$122.5m a year ago. Click the image for more detail. But it also has US$304.6m in cash to offset that, meaning it has US$45.9m net cash.
How Healthy Is Vocera Communications' Balance Sheet?
The latest balance sheet data shows that Vocera Communications had liabilities of US$128.6m due within a year, and liabilities of US$235.8m falling due after that. On the other hand, it had cash of US$304.6m and US$50.6m worth of receivables due within a year. So its liabilities total US$9.17m more than the combination of its cash and short-term receivables.
Having regard to Vocera Communications' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$2.06b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Vocera Communications boasts net cash, so it's fair to say it does not have a heavy debt load!
We also note that Vocera Communications improved its EBIT from a last year's loss to a positive US$2.5m. 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 Vocera Communications's ability to maintain a healthy balance sheet going forward. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Vocera Communications 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 year, Vocera Communications actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
We could understand if investors are concerned about Vocera Communications's liabilities, but we can be reassured by the fact it has has net cash of US$45.9m. And it impressed us with free cash flow of US$40m, being 1,630% of its EBIT. So we are not troubled with Vocera Communications's debt use. 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. For example, we've discovered 2 warning signs for Vocera Communications that you should be aware of before investing here.
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.
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.
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