Here's Why Ceragon Networks (NASDAQ:CRNT) Has A Meaningful Debt Burden

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. Importantly, Ceragon Networks Ltd. (NASDAQ:CRNT) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Ceragon Networks

What Is Ceragon Networks's Net Debt?

As you can see below, at the end of December 2021, Ceragon Networks had US$14.8m of debt, up from US$5.98m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$17.1m in cash, so it actually has US$2.28m net cash.

How Healthy Is Ceragon Networks' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ceragon Networks had liabilities of US$115.7m due within 12 months and liabilities of US$39.7m due beyond that. On the other hand, it had cash of US$17.1m and US$135.5m worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that Ceragon Networks' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$187.0m company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Ceragon Networks also has more cash than debt, so we're pretty confident it can manage its debt safely.

Notably, Ceragon Networks made a loss at the EBIT level, last year, but improved that to positive EBIT of US$4.8m in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Ceragon Networks'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Ceragon Networks 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 year, Ceragon Networks saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

We could understand if investors are concerned about Ceragon Networks's liabilities, but we can be reassured by the fact it has has net cash of US$2.28m. So while Ceragon Networks does not have a great balance sheet, it's certainly not too bad. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Ceragon Networks has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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.