We Think NICE (TLV:NICE) Can Manage Its Debt With Ease

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that NICE Ltd. (TLV:NICE) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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

How Much Debt Does NICE Carry?

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. However, its balance sheet shows it holds US$1.56b in cash, so it actually has US$875.9m net cash.

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$14.1b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, NICE boasts net cash, so it's fair to say it does not have a heavy debt load!

NICE's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. 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.

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

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. And it impressed us with free cash flow of US$433m, being 153% of its EBIT. So is NICE's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of NICE's earnings per share history for free.

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.

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