Is Ribbon Communications (NASDAQ:RBBN) A Risky Investment?

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.' 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, Ribbon Communications Inc. (NASDAQ:RBBN) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Ribbon Communications

What Is Ribbon Communications's Net Debt?

The image below, which you can click on for greater detail, shows that Ribbon Communications had debt of US$350.4m at the end of March 2022, a reduction from US$388.2m over a year. On the flip side, it has US$95.5m in cash leading to net debt of about US$254.9m.

A Look At Ribbon Communications' Liabilities

According to the last reported balance sheet, Ribbon Communications had liabilities of US$338.2m due within 12 months, and liabilities of US$451.6m due beyond 12 months. Offsetting these obligations, it had cash of US$95.5m as well as receivables valued at US$221.0m due within 12 months. So it has liabilities totalling US$473.2m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of US$492.5m, so it does suggest shareholders should keep an eye on Ribbon Communications' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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 Ribbon Communications'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.

In the last year Ribbon Communications had a loss before interest and tax, and actually shrunk its revenue by 6.1%, to US$825m. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Ribbon Communications produced an earnings before interest and tax (EBIT) loss. Indeed, it lost US$9.4m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of US$202m into a profit. So in short it's a really risky stock. 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. Case in point: We've spotted 2 warning signs for Ribbon Communications you should be aware of, and 1 of them is a bit unpleasant.

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.

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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.