Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Ceragon Networks Ltd. (NASDAQ:CRNT) does use debt in its business. 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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Ceragon Networks Carry?
You can click the graphic below for the historical numbers, but it shows that Ceragon Networks had US$5.98m of debt in December 2020, down from US$14.6m, one year before. However, it does have US$27.1m in cash offsetting this, leading to net cash of US$21.1m.
How Strong Is Ceragon Networks' Balance Sheet?
We can see from the most recent balance sheet that Ceragon Networks had liabilities of US$100.4m falling due within a year, and liabilities of US$25.9m due beyond that. Offsetting this, it had US$27.1m in cash and US$122.0m in receivables that were due within 12 months. So it can boast US$22.8m more liquid assets than total liabilities.
This short term liquidity is a sign that Ceragon Networks could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Ceragon Networks boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Ceragon Networks made a loss at the EBIT level, and saw its revenue drop to US$263m, which is a fall of 7.9%. We would much prefer see growth.
So How Risky Is Ceragon Networks?
Although Ceragon Networks had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$11m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Ceragon Networks , and understanding them should be part of your investment process.
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.
When trading Ceragon Networks or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account.
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. 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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.