Health Check: How Prudently Does Conduent (NASDAQ:CNDT) Use Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Conduent Incorporated (NASDAQ:CNDT) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Conduent

What Is Conduent's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Conduent had US$715.0m of debt in September 2024, down from US$1.28b, one year before. However, it also had US$393.0m in cash, and so its net debt is US$322.0m.

A Look At Conduent's Liabilities

According to the last reported balance sheet, Conduent had liabilities of US$827.0m due within 12 months, and liabilities of US$991.0m due beyond 12 months. On the other hand, it had cash of US$393.0m and US$823.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$602.0m.

This deficit is considerable relative to its market capitalization of US$630.0m, so it does suggest shareholders should keep an eye on Conduent's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Conduent 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.

In the last year Conduent had a loss before interest and tax, and actually shrunk its revenue by 6.6%, to US$3.5b. We would much prefer see growth.

Caveat Emptor

Importantly, Conduent had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$1.0m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$60m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very 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. Case in point: We've spotted 2 warning signs for Conduent you should be aware of.

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.