Is ANSYS (NASDAQ:ANSS) A Risky Investment?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, ANSYS, Inc. (NASDAQ:ANSS) does carry debt. But the real question is whether this debt is making the company risky.

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for ANSYS

How Much Debt Does ANSYS Carry?

The image below, which you can click on for greater detail, shows that at September 2021 ANSYS had debt of US$753.5m, up from US$423.8m in one year. But on the other hand it also has US$1.08b in cash, leading to a US$327.9m net cash position.

How Strong Is ANSYS' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ANSYS had liabilities of US$600.4m due within 12 months and liabilities of US$1.04b due beyond that. Offsetting these obligations, it had cash of US$1.08b as well as receivables valued at US$624.8m due within 12 months. So it can boast US$70.7m more liquid assets than total liabilities.

Having regard to ANSYS' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$26.1b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that ANSYS has more cash than debt is arguably a good indication that it can manage its debt safely.

Also positive, ANSYS grew its EBIT by 27% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine ANSYS'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. ANSYS 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. Over the last three years, ANSYS 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 it is always sensible to investigate a company's debt, in this case ANSYS has US$327.9m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$592m, being 102% of its EBIT. So we don't think ANSYS's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for ANSYS you should be aware of.

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.

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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.