Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Ceragon Networks Ltd. (NASDAQ:CRNT) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Ceragon Networks Carry?

The image below, which you can click on for greater detail, shows that Ceragon Networks had debt of US$25.2m at the end of September 2024, a reduction from US$38.2m over a year. But on the other hand it also has US$34.0m in cash, leading to a US$8.81m net cash position.

How Strong Is Ceragon Networks' Balance Sheet?

According to the last reported balance sheet, Ceragon Networks had liabilities of US$132.1m due within 12 months, and liabilities of US$28.0m due beyond 12 months. Offsetting these obligations, it had cash of US$34.0m as well as receivables valued at US$140.1m due within 12 months. So it actually has US$14.0m 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.

Better yet, Ceragon Networks grew its EBIT by 213% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Ceragon Networks can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. In the last three years, Ceragon Networks basically broke even on a free cash flow basis. While many companies do operate at break-even, we prefer see substantial free cash flow, especially if a it already has dead.

Summing Up

While it is always sensible to investigate a company's debt, in this case Ceragon Networks has US$8.81m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 213% over the last year. So is Ceragon Networks's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Ceragon Networks, you may well want to click here to check an interactive graph of its earnings per share history.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.