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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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. 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 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Ceragon Networks
What Is Ceragon Networks's Debt?
As you can see below, Ceragon Networks had US$12.0m of debt at March 2021, down from US$32.9m a year prior. However, it does have US$33.0m in cash offsetting this, leading to net cash of US$21.0m.
A Look At Ceragon Networks' Liabilities
We can see from the most recent balance sheet that Ceragon Networks had liabilities of US$102.5m falling due within a year, and liabilities of US$42.2m due beyond that. Offsetting these obligations, it had cash of US$33.0m as well as receivables valued at US$119.9m due within 12 months. So it actually has US$8.22m more liquid assets than total liabilities.
This short term liquidity is a sign that Ceragon Networks could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Ceragon Networks has more cash than debt is arguably a good indication that it can manage its debt safely.
Although Ceragon Networks made a loss at the EBIT level, last year, it was also good to see that it generated US$296k in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Ceragon Networks'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.