Howard Marks put it nicely when he said that, rather than worrying about share price volatility, ‘The possibility of permanent loss is the risk I worry about… and every practical investor I know worries about. So it seems the smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess how risky a company is. We note that Boingo Wireless, Inc. (NASDAQ:WIFI) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company’s use of debt, we first look at cash and debt together.
What Is Boingo Wireless’s Debt?
The image below, which you can click on for greater detail, shows that at March 2020 Boingo Wireless had debt of US$267.0m, up from US$160.5m in one year. However, because it has a cash reserve of US$175.2m, its net debt is less, at about US$91.8m.
How Strong Is Boingo Wireless’s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Boingo Wireless had liabilities of US$159.7m due within 12 months and liabilities of US$454.4m due beyond that. Offsetting these obligations, it had cash of US$175.2m as well as receivables valued at US$37.9m due within 12 months. So it has liabilities totalling US$401.0m more than its cash and near-term receivables, combined.
This deficit isn’t so bad because Boingo Wireless is worth US$696.4m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it’s clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Boingo Wireless’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.
In the last year Boingo Wireless’s revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.
Importantly, Boingo Wireless had negative earnings before interest and tax (EBIT), over the last year. To be specific the EBIT loss came in at US$1.6m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn’t help that it burned through US$20m of cash over the last year. So suffice it to say we do consider the stock to be 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. Take risks, for example – Boingo Wireless has 2 warning signs we think you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don’t even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.