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. We note that Amdocs Limited (NASDAQ:DOX) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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.
What Is Amdocs's Net Debt?
As you can see below, Amdocs had US$645.7m of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$742.5m in cash offsetting this, leading to net cash of US$96.8m.
How Healthy Is Amdocs' Balance Sheet?
We can see from the most recent balance sheet that Amdocs had liabilities of US$1.35b falling due within a year, and liabilities of US$1.51b due beyond that. Offsetting this, it had US$742.5m in cash and US$944.5m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.17b.
Of course, Amdocs has a market capitalization of US$9.97b, 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. 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 8.6% 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 ultimately the future profitability of the business will decide if Amdocs can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Amdocs 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, Amdocs recorded free cash flow worth a fulsome 98% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.
Although Amdocs's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$96.8m. And it impressed us with free cash flow of US$698m, being 98% of its EBIT. So is Amdocs's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Amdocs's earnings per share history for free.
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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