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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, 8×8, Inc. (NYSE:EGHT) does carry debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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 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. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. The first step when considering a company’s debt levels is to consider its cash and debt together.
How Much Debt Does 8×8 Carry?
The image below, which you can click on for greater detail, shows that at March 2019 8×8 had debt of US$216.0m, up from none in one year. But on the other hand it also has US$346.5m in cash, leading to a US$130.4m net cash position.
How Healthy Is 8×8’s Balance Sheet?
The latest balance sheet data shows that 8×8 had liabilities of US$74.7m due within a year, and liabilities of US$222.3m falling due after that. Offsetting these obligations, it had cash of US$346.5m as well as receivables valued at US$25.9m due within 12 months. So it can boast US$75.4m more liquid assets than total liabilities.
This surplus suggests that 8×8 has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 8×8 boasts net cash, so it’s fair to say it does not have a heavy debt load! 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 8×8 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.
In the last year 8×8 managed to grow its revenue by 19%, to US$353m. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is 8×8?
We have no doubt that loss making companies are, in general, riskier than profitable ones. Anf the fact is that over the last twelve months 8×8 lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$50m of cash and made a loss of US$89m. But the saving grace is the US$346m on the balance sheet. That means it could keep spending at its current rate for more than five years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn’t produce free cash flow regularly. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting 8×8 insider transactions.
At the end of the day, it’s often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It’s free.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.