These 4 Measures Indicate That Ceragon Networks (NASDAQ:CRNT) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Ceragon Networks Ltd. (NASDAQ:CRNT) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Ceragon Networks

What Is Ceragon Networks's Net Debt?

The image below, which you can click on for greater detail, shows that Ceragon Networks had debt of US$25.2m at the end of September 2024, a reduction from US$38.2m over a year. But it also has US$34.0m in cash to offset that, meaning it has US$8.81m net cash.

How Healthy Is Ceragon Networks' Balance Sheet?

We can see from the most recent balance sheet that Ceragon Networks had liabilities of US$132.1m falling due within a year, and liabilities of US$28.0m due beyond that. Offsetting these obligations, it had cash of US$34.0m as well as receivables valued at US$140.1m due within 12 months. So it actually has US$14.0m more liquid assets than total liabilities.

This surplus suggests that Ceragon Networks has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Ceragon Networks boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Ceragon Networks grew its EBIT by 213% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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 Ceragon Networks 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. While Ceragon Networks 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. In the last three years, Ceragon Networks basically broke even on a free cash flow basis. Some might say that's a concern, when it comes considering how easily it would be for it to down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Ceragon Networks has US$8.81m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 213% over the last year. So we don't think Ceragon Networks's use of debt is risky. 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. Case in point: We've spotted 1 warning sign for Ceragon Networks you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.