Warren Buffett famously said, ‘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. We note that Proofpoint, Inc. (NASDAQ:PFPT) does have debt on its balance sheet. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company’s debt levels is to consider its cash and debt together.
What Is Proofpoint’s Debt?
The image below, which you can click on for greater detail, shows that at March 2020 Proofpoint had debt of US$758.0m, up from none in one year. But it also has US$945.7m in cash to offset that, meaning it has US$187.7m net cash.
How Strong Is Proofpoint’s Balance Sheet?
According to the last reported balance sheet, Proofpoint had liabilities of US$741.3m due within 12 months, and liabilities of US$998.8m due beyond 12 months. Offsetting this, it had US$945.7m in cash and US$172.1m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$622.3m.
Since publicly traded Proofpoint shares are worth a total of US$6.68b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Proofpoint 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 Proofpoint 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.
Over 12 months, Proofpoint reported revenue of US$935m, which is a gain of 23%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Proofpoint?
While Proofpoint lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$239m. So although it is loss-making, it doesn’t seem to have too much near-term balance sheet risk, keeping in mind the net cash. One positive is that Proofpoint is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But we still think it’s somewhat risky. There’s no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet – far from it. For example, we’ve discovered 2 warning signs for Proofpoint that you should be aware of before investing here.
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.
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.
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