Is Amdocs (NASDAQ:DOX) Using Too Much Debt?

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. 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 is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Amdocs

How Much Debt Does Amdocs Carry?

The chart below, which you can click on for greater detail, shows that Amdocs had US$645.3m in debt in December 2022; about the same as the year before. But it also has US$734.6m in cash to offset that, meaning it has US$89.3m net cash.

A Look At Amdocs' Liabilities

According to the last reported balance sheet, Amdocs had liabilities of US$1.33b due within 12 months, and liabilities of US$1.54b due beyond 12 months. On the other hand, it had cash of US$734.6m and US$1.14b worth of receivables due within a year. So it has liabilities totalling US$998.2m more than its cash and near-term receivables, combined.

Of course, Amdocs has a titanic market capitalization of US$10.8b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Amdocs boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Amdocs grew its EBIT by 9.8% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. 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 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. 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. Over the last three years, Amdocs recorded free cash flow worth a fulsome 87% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

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$89.3m. And it impressed us with free cash flow of US$432m, being 87% of its EBIT. So we don't think Amdocs's use of debt is risky. 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.

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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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.