David Eben put it well: “Volatility is not a risk we care about.” Our focus is to avoid permanent loss of capital. ” In other words, financially smart people seem to know that debt (usually associated with bankruptcy) is a very important factor when assessing a company’s risk. the important thing is, Juniper Networks, Inc. (NYSE:JNPR) has debt. But the more important question is how much risk that debt creates.
When is debt a problem?
Debt and other liabilities become a risk to a company if it cannot easily meet those obligations through free cash flow or by raising capital at an attractive price. If the situation gets too bad, lenders may take control of your business. But a more frequent (but still costly) occurrence is when a company must issue stock at a bargain price, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is one in which a company manages its debt reasonably well and to its own advantage. When we think about a company’s use of debt, we first think of cash and debt together.
Check out our latest analysis for Juniper Networks.
What is Juniper Networks’ debt?
The graph below, which you can click on for greater detail, shows that Juniper Networks had debt of US$1.69b at September 2023. Almost the same as last year. On the other hand, the company has his cash of US$1.38 billion, leading to net debt of around US$312.9 million.
How healthy is Juniper Networks’ balance sheet?
The most recent balance sheet shows that Juniper Networks had debt of US$2.24b falling due within a year, and debt of US$2.84b falling due beyond that. On the other hand, it had cash of US$1.38 billion and receivables worth US$937.3 million that were due within a year. So its total liabilities total US$2.76b more than its cash and short-term receivables, combined.
Juniper Networks has a market capitalization of $9.24 billion, so it’s very likely that it will raise cash to shore up its balance sheet if needed. However, it is clear that we need to take a close look at whether debt can be managed without dilution.
To determine how much debt a company has relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA), and its earnings before interest, tax, and amortization (EBIT) divided by its interest expense. (its interest cover). Therefore, we consider debt relative to earnings, with or without depreciation.
Juniper Networks’ net debt to EBITDA ratio is low at just 0.38. Also, its EBIT easily covers its interest expense at 18.7x. So we’re pretty relaxed about that ultra-conservative use of debt. It’s also positive that Juniper Networks grew its EBIT by 27% in the last year, which should make it easier to pay down its debt going forward. The balance sheet is clearly the area to focus on when analyzing debt. But more than anything else, future earnings will determine Juniper Networks’ ability to maintain a healthy balance sheet going forward.If you’re focused on the future, check this out free A report showing analyst profit forecasts.
But final considerations are also important. This is because companies cannot pay their debts with paper profits. I need cold cash. So it’s worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Juniper Networks generated very solid free cash flow representing 90% of its EBIT. This exceeds our expectations. This puts the company in a very favorable position to repay its debt.
our view
The good news is that Juniper Networks’ proven ability to cover its interest expense with EBIT pleases us like a fluffy puppy does a toddler. And this is just the beginning of the good news, as the conversion of EBIT to free cash flow is also very encouraging. Overall, we don’t think Juniper Networks is a bad risk as its debt load doesn’t seem to be too high. Therefore, the balance sheet looks very healthy. There’s no question that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet, far from it. To do so, you need to know the following: two warning signs We discovered this in collaboration with Juniper Networks.
At the end of the day, it’s often better to focus on companies with no net debt. You can access a special list of such companies (all with a track record of profit growth). It’s free.
What risks and opportunities are there? juniper networks?
Juniper Networks, Inc. designs, develops and markets networking products and services worldwide.
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reward
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Trading at 43.4% below our fair value estimate
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Earnings are expected to grow 16.03% annually
risk
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Large one-time items that impact performance
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This article by Simply Wall St is general in nature. We provide commentary using only unbiased methodologies, based on historical data and analyst forecasts, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.