David Iben put it well when he said, ‘Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital. 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 can see that Forescout Technologies, Inc. (NASDAQ:FSCT) does use debt in its business. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.
What Is Forescout Technologies’s Net Debt?
As you can see below, Forescout Technologies had US$10.1m of debt at September 2019, down from US$17.4m a year prior. However, its balance sheet shows it holds US$93.7m in cash, so it actually has US$83.6m net cash.
How Healthy Is Forescout Technologies’s Balance Sheet?
We can see from the most recent balance sheet that Forescout Technologies had liabilities of US$172.8m falling due within a year, and liabilities of US$132.3m due beyond that. On the other hand, it had cash of US$93.7m and US$84.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$126.9m.
Of course, Forescout Technologies has a market capitalization of US$1.34b, so these liabilities are probably manageable. Having said that, it’s clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Forescout Technologies 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 it is future earnings, more than anything, that will determine Forescout Technologies’s ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Forescout Technologies reported revenue of US$330m, which is a gain of 20%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is Forescout Technologies?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Forescout Technologies had negative earnings before interest and tax (EBIT), truth be told. And over the same period it saw negative free cash outflow of US$33m and booked a US$116m accounting loss. While this does make the company a bit risky, it’s important to remember it has net cash of US$83.6m. That means it could keep spending at its current rate for more than two years. Summing up, we’re a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet – far from it. To that end, you should be aware of the 3 warning signs we’ve spotted with Forescout Technologies .
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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