AudioCodes (NASDAQ:AUDC) Seems To Use Debt Rather Sparingly

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. 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. Importantly, AudioCodes Ltd. (NASDAQ:AUDC) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for AudioCodes

What Is AudioCodes's Debt?

You can click the graphic below for the historical numbers, but it shows that AudioCodes had US$3.67m of debt in December 2019, down from US$6.17m, one year before. But it also has US$64.8m in cash to offset that, meaning it has US$61.1m net cash.

How Strong Is AudioCodes's Balance Sheet?

According to the last reported balance sheet, AudioCodes had liabilities of US$86.7m due within 12 months, and liabilities of US$65.2m due beyond 12 months. On the other hand, it had cash of US$64.8m and US$32.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$54.4m.

Given AudioCodes has a market capitalization of US$760.7m, it's hard to believe these liabilities pose much threat. 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, AudioCodes boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that AudioCodes has boosted its EBIT by 36%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if AudioCodes 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 company can only pay off debt with cold hard cash, not accounting profits. AudioCodes 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. Happily for any shareholders, AudioCodes actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that AudioCodes has US$61.1m in net cash. The cherry on top was that in converted 126% of that EBIT to free cash flow, bringing in US$21m. So we don't think AudioCodes's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for AudioCodes that you should be aware of before investing here.

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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

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