David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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, Ceragon Networks Ltd. (NASDAQ:CRNT) does carry debt. But should shareholders be worried about its use of debt?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we think about a company's use of debt, we first look at cash and debt together.
What Is Ceragon Networks's Debt?
The image below, which you can click on for greater detail, shows that Ceragon Networks had debt of US$12.0m at the end of March 2021, a reduction from US$32.9m over a year. However, it does have US$33.0m in cash offsetting this, leading to net cash of US$21.0m.NasdaqGS:CRNT Debt to Equity History June 12th 2021
A Look At Ceragon Networks' Liabilities
The latest balance sheet data shows that Ceragon Networks had liabilities of US$102.5m due within a year, and liabilities of US$42.2m falling due after that. On the other hand, it had cash of US$33.0m and US$119.9m worth of receivables due within a year. So it actually has US$8.22m more liquid assets than total liabilities.
This surplus suggests that Ceragon Networks has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Ceragon Networks has more cash than debt is arguably a good indication that it can manage its debt safely.
Notably, Ceragon Networks made a loss at the EBIT level, last year, but improved that to positive EBIT of US$296k in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Ceragon Networks'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Ceragon Networks 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. Happily for any shareholders, Ceragon Networks actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
While we empathize with investors who find debt concerning, you should keep in mind that Ceragon Networks has net cash of US$21.0m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$5.0m, being 1,680% of its EBIT. So we are not troubled with Ceragon Networks's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Ceragon Networks has 2 warning signs we think 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.
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 (at) simplywallst.com.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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