Ciena (NYSE: CIEN) has a pretty healthy track record

Howard Marks put it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. So it can be obvious that you need to consider debt, when you think about how risky a given stock is, because too much debt can sink a business. Above all, Ciena Company (NYSE: CIEN) is in debt. But does this debt worry shareholders?

When Is Debt a Problem?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. 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 has to raise new equity at low cost, thereby constantly diluting shareholders. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we think of a business’s use of debt, we first look at cash flow and debt together.

How much debt does Ciena have?

The graph below, which you can click for more details, shows that Ciena had $ 699.5 million in debt as of July 2021; about the same as the year before. However, his balance sheet shows that he holds $ 1.41 billion in cash, so he actually has $ 713.0 million in net cash.

NYSE: CIEN Debt to Equity History November 26, 2021

Is Ciena’s track record healthy?

Zooming in on the latest balance sheet data, we can see that Ciena had a liability of US $ 827.1 million due within 12 months and a liability of US $ 904.5 million beyond. In return, he had $ 1.41 billion in cash and $ 996.1 million in receivables due within 12 months. So he actually has $ 676.9 million Following liquid assets as total liabilities.

This short-term liquidity is a sign that Ciena could probably repay its debt easily, as its balance sheet is far from tight. In short, Ciena has a net cash flow, so it’s fair to say that she doesn’t have a lot of debt!

But the bad news is that Ciena has seen its EBIT drop 13% over the past twelve months. We believe that this type of performance, if repeated frequently, could well cause difficulties for the title. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Ciena 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, while the IRS may love accounting profits, lenders only accept hard cash. Ciena may have net cash on the balance sheet, but it’s always interesting to consider how well the business converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and its ability to manage debt. Over the past three years, Ciena has recorded free cash flow of 78% of its EBIT, which is close to normal given that free cash flow excludes interest and taxes. This hard cash allows him to reduce his debt whenever he wants.

In summary

While we sympathize with investors who find the debt of concern, you should keep in mind that Ciena has net cash of US $ 713.0 million, as well as more liquid assets than liabilities. And he impressed us with free cash flow of US $ 385 million, or 78% of his EBIT. So we don’t think Ciena’s use of debt is risky. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. Concrete example: we have spotted 1 warning sign for Ciena you must be aware.

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 net growth stocks.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.

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