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.’ When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that ACI Worldwide, Inc. (NASDAQ:ACIW) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company’s use of debt, we first look at cash and debt together.
Check out our latest analysis for ACI Worldwide
What Is ACI Worldwide’s Net Debt?
You can click the graphic below for the historical numbers, but it shows that ACI Worldwide had US$1.03b of debt in September 2022, down from US$1.09b, one year before. However, it also had US$134.8m in cash, and so its net debt is US$895.4m.
A Look At ACI Worldwide’s Liabilities
The latest balance sheet data shows that ACI Worldwide had liabilities of US$998.0m due within a year, and liabilities of US$1.07b falling due after that. Offsetting this, it had US$134.8m in cash and US$302.3m in receivables that were due within 12 months. So it has liabilities totalling US$1.63b more than its cash and near-term receivables, combined.
This is a mountain of leverage relative to its market capitalization of US$2.59b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.
ACI Worldwide’s debt is 3.2 times its EBITDA, and its EBIT cover its interest expense 6.2 times over. This suggests that while the debt levels are significant, we’d stop short of calling them problematic. Importantly, ACI Worldwide grew its EBIT by 31% over the last twelve months, and that growth will make it easier to handle its debt. 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 ACI Worldwide 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, ACI Worldwide generated free cash flow amounting to a very robust 97% of its EBIT, more than we’d expect. That positions it well to pay down debt if desirable to do so.
Our View
ACI Worldwide’s conversion of EBIT to free cash flow suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14’s goalkeeper. But, on a more sombre note, we are a little concerned by its net debt to EBITDA. All these things considered, it appears that ACI Worldwide can comfortably handle its current debt levels. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it’s worth keeping an eye on this one. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we’ve spotted 2 warning signs for ACI Worldwide you should know about.
If, after all that, you’re more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
What are the risks and opportunities for ACI Worldwide?
ACI Worldwide, Inc., a software company, develops, markets, installs, and supports a range of software products and solutions for facilitating digital payments to banks, merchants, and billers worldwide.
Rewards
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Trading at 24.8% below our estimate of its fair value
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Earnings grew by 88.9% over the past year
Risks
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Earnings are forecast to decline by an average of 2.2% per year for the next 3 years
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Debt is not well covered by operating cash flow
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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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