Ribbon Communications (NASDAQ: RBBN) has a fairly healthy track record
Warren Buffett said: “Volatility is far from synonymous with risk”. It’s only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Like many other companies Ruban Communications Inc. (NASDAQ: RBBN) uses debt. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
Check out our latest review for Ribbon Communications
What is the debt of Ribbon Communications?
As you can see below, Ribbon Communications had a debt of US $ 383.9 million in June 2021, up from US $ 405.6 million the year before. On the other hand, it has $ 112.2 million in cash, resulting in net debt of around $ 271.7 million.
How strong is Ribbon Communications’ balance sheet?
The latest balance sheet data shows that Ribbon Communications had liabilities of US $ 287.2 million due within one year, and liabilities of US $ 502.5 million due thereafter. In compensation for these obligations, it had cash of US $ 112.2 million as well as receivables valued at US $ 219.9 million due within 12 months. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by $ 457.7 million.
Ribbon Communications has a market capitalization of US $ 986.4 million, so it could most likely raise funds to improve its balance sheet, should the need arise. But we absolutely want to keep our eyes open for indications that its debt is too risky.
We measure a company’s debt load relative to its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT) covers its interest costs (interest coverage). Thus, we look at debt over earnings with and without amortization charges.
Ribbon Communications has net debt of 2.0 times EBITDA, which isn’t too much, but its interest coverage looks a bit weak, with EBIT at just 2.6 times interest expense. It appears the company incurs significant depreciation and amortization costs, so perhaps its debt load is heavier than it first appears, since EBITDA is arguably a generous measure of profits. Notably, Ribbon Communications’ EBIT was higher than Elon Musk’s, gaining a whopping 127% from last year. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Ribbon Communications can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Finally, a business can only repay its debts with hard cash, not with book profits. We must therefore clearly verify whether this EBIT generates a corresponding free cash flow. Over the past two years, Ribbon Communications has actually generated more free cash flow than EBIT. This kind of strong cash generation warms our hearts like a puppy in a bumblebee costume.
Our point of view
The good news is that Ribbon Communications’ demonstrated ability to convert EBIT into free cash flow delights us like a fluffy puppy does a toddler. But we have to admit that we find that his hedging interest has the opposite effect. Looking at all of the above factors together, it seems to us that Ribbon Communications can handle their debt quite comfortably. On the plus side, this leverage can increase returns to shareholders, but the potential downside is more risk of loss, so it’s worth watching the balance sheet. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. To this end, you should inquire about the 4 warning signs we spotted with Ribbon Communications (including 2 that cannot be ignored).
If you are interested in investing in companies that can generate profits without the burden of debt, check out this page. free list of growing companies that have net cash on the balance sheet.
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