Amdocs (NASDAQ: DOX) Using Too Much Debt?
Legendary fund manager Li Lu (who Charlie Munger supported) once said, âThe biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Above all, Amdocs Limited (NASDAQ: DOX) is in debt. But does this debt worry shareholders?
What risk does debt entail?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, many companies use debt to finance their growth without negative consequences. When we think of a business’s use of debt, we first look at cash flow and debt together.
See our latest review for Amdocs
What is Amdocs’ net debt?
You can click on the chart below for historical numbers, but it shows that Amdocs had $ 644.4 million in debt as of June 2021, up from $ 743.8 million a year earlier. But it also has $ 1.05 billion in cash to make up for that, which means it has $ 402.2 million in net cash.
How strong is Amdocs’ balance sheet?
According to the latest published balance sheet, Amdocs had a liability of US $ 1.28 billion due within 12 months and a liability of US $ 1.62 billion due beyond 12 months. In return, he had $ 1.05 billion in cash and $ 925.1 million in receivables due within 12 months. As a result, its liabilities exceed the sum of its cash and receivables (short-term) by $ 922.0 million.
Given that Amdocs has a market cap of US $ 9.83 billion, it’s hard to believe that these liabilities pose a big threat. But there are enough liabilities that we would certainly recommend that shareholders continue to monitor the balance sheet going forward. While it has some liabilities to note, Amdocs also has more cash than debt, so we’re pretty confident it can handle its debt safely.
While Amdocs doesn’t appear to have gained much on the EBIT line, at least earnings remain stable for now. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Amdocs can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a business can only pay off its debts with hard cash, not with book profits. While Amdocs has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it’s building ( or erodes) that cash balance. . Over the past three years, Amdocs has generated free cash flow of a very solid 94% of its EBIT, more than we expected. This puts him in a very strong position to pay off the debt.
We could understand if investors are concerned about Amdocs’ liabilities, but we can take comfort in the fact that it has net cash of $ 402.2 million. And he impressed us with free cash flow of US $ 721 million, or 94% of his EBIT. We therefore do not believe that Amdocs’ use of debt is risky. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. Note that Amdocs displays 3 warning signs in our investment analysis , and 1 of them is a bit rude …
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash-flow net-growth stocks.
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