NICE (TLV:NICE) Could Easily Take On More Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that NICE Ltd. (TLV:NICE) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for NICE

What Is NICE's Debt?

As you can see below, at the end of September 2022, NICE had US$659.9m of debt, up from US$607.3m a year ago. Click the image for more detail. But it also has US$1.46b in cash to offset that, meaning it has US$801.3m net cash.

A Look At NICE's Liabilities

According to the last reported balance sheet, NICE had liabilities of US$1.06b due within 12 months, and liabilities of US$632.1m due beyond 12 months. On the other hand, it had cash of US$1.46b and US$469.2m worth of receivables due within a year. So it can boast US$235.3m 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 it's very unlikely that the US$12.3b company is short on cash, but still worth keeping an eye on the 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.

And we also note warmly that NICE grew its EBIT by 20% last year, making its debt load easier to handle. 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 NICE 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While NICE 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, NICE actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that NICE has net cash of US$801.3m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$343m, being 137% of its EBIT. So we don't think NICE's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - NICE has 1 warning sign we think you should be aware of.

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.