These 4 Measures Indicate That Amdocs (NASDAQ:DOX) Is Using Debt Safely

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Amdocs Limited (NASDAQ:DOX) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 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, 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Amdocs

How Much Debt Does Amdocs Carry?

As you can see below, Amdocs had US$645.5m of debt, at June 2023, which is about the same as the year before. You can click the chart for greater detail. But it also has US$749.5m in cash to offset that, meaning it has US$104.0m net cash.

How Healthy Is Amdocs' Balance Sheet?

We can see from the most recent balance sheet that Amdocs had liabilities of US$1.40b falling due within a year, and liabilities of US$1.49b due beyond that. Offsetting these obligations, it had cash of US$749.5m as well as receivables valued at US$1.08b due within 12 months. So its liabilities total US$1.06b more than the combination of its cash and short-term receivables.

Since publicly traded Amdocs shares are worth a very impressive total of US$10.4b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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 9.9% over twelve months, which should ease any concerns about debt repayment. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 94% 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$104.0m. And it impressed us with free cash flow of US$587m, being 94% of its EBIT. 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, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.