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Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ 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 Rapid7, Inc. (NASDAQ:RPD) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Rapid7
What Is Rapid7’s Debt?
The image below, which you can click on for greater detail, shows that at March 2019 Rapid7 had debt of US$177.2m, up from none in one year. However, it does have US$251.5m in cash offsetting this, leading to net cash of US$74.3m.
How Healthy Is Rapid7’s Balance Sheet?
We can see from the most recent balance sheet that Rapid7 had liabilities of US$228.4m falling due within a year, and liabilities of US$246.6m due beyond that. Offsetting these obligations, it had cash of US$251.5m as well as receivables valued at US$60.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$163.5m.
Of course, Rapid7 has a market capitalization of US$2.79b, 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. Given that Rapid7 has more cash than debt, we’re pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Rapid7’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, Rapid7 reported revenue of US$263m, which is a gain of 25%. With any luck the company will be able to grow its way to profitability.
So How Risky Is Rapid7?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Rapid7 had negative earnings before interest and tax (EBIT), truth be told. And over the same period it saw negative free cash outflow of US$38m and booked a US$51m accounting loss. While this does make the company a bit risky, it’s important to remember it has net cash of US$251m. That kitty means the company can keep spending for growth for at least five years, at current rates. Rapid7’s revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. For riskier companies like Rapid7 I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
Of course, if you’re the type of investor who prefers buying stocks without the burden of debt, then don’t hesitate to discover our exclusive list of net cash growth stocks, today.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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.