These 4 Measures Indicate That NICE (TLV:NICE) Is Using Debt Safely

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.' 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. Importantly, NICE Ltd. (TLV:NICE) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for NICE

How Much Debt Does NICE Carry?

The image below, which you can click on for greater detail, shows that at December 2021 NICE had debt of US$777.8m, up from US$681.2m in one year. However, it does have US$1.42b in cash offsetting this, leading to net cash of US$646.9m.

How Healthy Is NICE's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that NICE had liabilities of US$1.22b due within 12 months and liabilities of US$602.9m due beyond that. Offsetting these obligations, it had cash of US$1.42b as well as receivables valued at US$395.6m due within 12 months. So these liquid assets roughly match the 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$13.7b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, NICE also has more cash than debt, so we're pretty confident it can manage its debt safely.

Fortunately, NICE grew its EBIT by 9.4% in the last year, making that debt load look even more manageable. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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

We could understand if investors are concerned about NICE's liabilities, but we can be reassured by the fact it has has net cash of US$646.9m. The cherry on top was that in converted 150% of that EBIT to free cash flow, bringing in US$395m. So we don't think NICE's use of debt is risky. 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, we've discovered 1 warning sign for NICE that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.