Amdocs (NASDAQ:DOX) Has A Rock Solid Balance Sheet

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. As with many other companies Amdocs Limited (NASDAQ:DOX) makes use of debt. But the more important question is: how much risk is that debt creating?

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. 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. 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.

View our latest analysis for Amdocs

What Is Amdocs's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Amdocs had debt of US$744.1m, up from none in one year. However, its balance sheet shows it holds US$1.51b in cash, so it actually has US$768.8m net cash.

A Look At Amdocs' Liabilities

We can see from the most recent balance sheet that Amdocs had liabilities of US$1.37b falling due within a year, and liabilities of US$1.63b due beyond that. On the other hand, it had cash of US$1.51b and US$929.1m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$556.4m.

Given Amdocs has a humongous market capitalization of US$10.2b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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.

Fortunately, Amdocs grew its EBIT by 4.2% in the last year, making that debt load look even more manageable. 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 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 91% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

We could understand if investors are concerned about Amdocs's liabilities, but we can be reassured by the fact it has has net cash of US$768.8m. And it impressed us with free cash flow of US$714m, being 91% of its EBIT. So we don't think Amdocs's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Amdocs has 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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