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Ceragon Networks (NASDAQ:CRNT) Takes On Some Risk With Its Use Of Debt

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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Ceragon Networks Ltd. (NASDAQ:CRNT) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Ceragon Networks

What Is Ceragon Networks's Debt?

As you can see below, at the end of December 2021, Ceragon Networks had US$14.8m of debt, up from US$5.98m a year ago. Click the image for more detail. But on the other hand it also has US$17.1m in cash, leading to a US$2.28m net cash position.

debt-equity-history-analysis
debt-equity-history-analysis

How Strong Is Ceragon Networks' Balance Sheet?

According to the last reported balance sheet, Ceragon Networks had liabilities of US$115.7m due within 12 months, and liabilities of US$39.7m due beyond 12 months. Offsetting these obligations, it had cash of US$17.1m as well as receivables valued at US$135.5m due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that Ceragon Networks' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$159.4m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Ceragon Networks also has more cash than debt, so we're pretty confident it can manage its debt safely.

Notably, Ceragon Networks made a loss at the EBIT level, last year, but improved that to positive EBIT of US$4.8m in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Ceragon Networks may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last year, Ceragon Networks burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Ceragon Networks has US$2.28m in net cash. So although we see some areas for improvement, we're not too worried about Ceragon Networks's balance sheet. While Ceragon Networks didn't make a statutory profit in the last year, its positive EBIT suggests that profitability might not be far away. Click here to see if its earnings are heading in the right direction, over the medium term.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.

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