Amdocs (NASDAQ:DOX) Could Easily Take On More Debt

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.' 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. We note that Amdocs Limited (NASDAQ:DOX) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Amdocs

What Is Amdocs's Net Debt?

The image below, which you can click on for greater detail, shows that Amdocs had debt of US$644.8m at the end of March 2022, a reduction from US$744.3m over a year. But it also has US$856.4m in cash to offset that, meaning it has US$211.6m net cash.

How Strong Is Amdocs' Balance Sheet?

According to the last reported balance sheet, Amdocs had liabilities of US$1.40b due within 12 months, and liabilities of US$1.55b due beyond 12 months. Offsetting these obligations, it had cash of US$856.4m as well as receivables valued at US$1.02b due within 12 months. So it has liabilities totalling US$1.08b more than its cash and near-term receivables, combined.

Of course, Amdocs has a titanic market capitalization of US$10.3b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Amdocs also has more cash than debt, so we're pretty confident it can manage its debt safely.

The good news is that Amdocs has increased its EBIT by 8.4% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Amdocs's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Amdocs 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. During the last three years, Amdocs generated free cash flow amounting to a very robust 97% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While Amdocs does have more liabilities than liquid assets, it also has net cash of US$211.6m. The cherry on top was that in converted 97% of that EBIT to free cash flow, bringing in US$546m. So is Amdocs's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Amdocs, you may well want to click here to check an interactive graph of its earnings per share history.

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.