Is Ribbon Communications (NASDAQ:RBBN) Using Too Much Debt?

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

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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, 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.

Check out 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$330.8m at the end of September 2022, a reduction from US$378.5m over a year. However, it does have US$66.7m in cash offsetting this, leading to net debt of about US$264.1m.

A Look At Ribbon Communications' Liabilities

We can see from the most recent balance sheet that Ribbon Communications had liabilities of US$298.1m falling due within a year, and liabilities of US$437.4m due beyond that. Offsetting these obligations, it had cash of US$66.7m as well as receivables valued at US$237.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$430.9m.

This is a mountain of leverage relative to its market capitalization of US$588.4m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Over 12 months, Ribbon Communications made a loss at the EBIT level, and saw its revenue drop to US$817m, which is a fall of 4.9%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Ribbon Communications produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$36m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$47m of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Ribbon Communications , and understanding them should be part of your investment process.

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.