Is NICE (TLV:NICE) Using Too Much Debt?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies NICE Ltd. (TLV:NICE) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for NICE

What Is NICE's Net Debt?

As you can see below, at the end of March 2021, NICE had US$685.3m of debt, up from US$467.2m a year ago. Click the image for more detail. But on the other hand it also has US$1.56b in cash, leading to a US$875.9m net cash position.

A Look At NICE's Liabilities

We can see from the most recent balance sheet that NICE had liabilities of US$1.06b falling due within a year, and liabilities of US$640.8m due beyond that. On the other hand, it had cash of US$1.56b and US$322.7m worth of receivables due within a year. So it actually has US$180.1m more liquid assets than total liabilities.

Having regard to NICE's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$18.6b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that NICE has more cash than debt is arguably a good indication that it can manage its debt safely.

While NICE doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine NICE'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 company can only pay off debt with cold hard cash, not accounting profits. NICE 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. Happily for any shareholders, NICE actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that NICE has net cash of US$875.9m, as well as more liquid assets than liabilities. The cherry on top was that in converted 153% of that EBIT to free cash flow, bringing in US$433m. So is NICE'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. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with NICE , and understanding them should be part of your investment process.

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.

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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.
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