The external fund manager backed by Berkshire Hathaway’s Charlie Munger, Li Lu, makes no bones about it when he says ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.’ It’s only natural to consider a company’s balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Benefitfocus, Inc. (NASDAQ:BNFT) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Benefitfocus’s Net Debt?
As you can see below, at the end of June 2019, Benefitfocus had US$183.7m of debt, up from US$128.4m a year ago. Click the image for more detail. However, it also had US$138.4m in cash, and so its net debt is US$45.3m.
How Healthy Is Benefitfocus’s Balance Sheet?
We can see from the most recent balance sheet that Benefitfocus had liabilities of US$74.4m falling due within a year, and liabilities of US$279.9m due beyond that. Offsetting these obligations, it had cash of US$138.4m as well as receivables valued at US$42.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$173.4m.
Benefitfocus has a market capitalization of US$862.9m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Benefitfocus’s ability to maintain a healthy balance sheet going forward. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Benefitfocus reported revenue of US$273m, which is a gain of 10%. We usually like to see faster growth from unprofitable companies, but each to their own.
Importantly, Benefitfocus had negative earnings before interest and tax (EBIT), over the last year. Indeed, it lost US$36m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$19m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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 Benefitfocus insider transactions.
If you’re interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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