These 4 Measures Indicate That Boku (LON:BOKU) Is Using Debt Safely

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.' 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 can see that Boku, Inc. (LON:BOKU) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Boku

What Is Boku's Debt?

The image below, which you can click on for greater detail, shows that at June 2020 Boku had debt of US$19.5m, up from US$2.00m in one year. However, it does have US$79.9m in cash offsetting this, leading to net cash of US$60.4m.

How Strong Is Boku's Balance Sheet?

The latest balance sheet data shows that Boku had liabilities of US$87.2m due within a year, and liabilities of US$21.6m falling due after that. On the other hand, it had cash of US$79.9m and US$59.7m worth of receivables due within a year. So it actually has US$30.8m more liquid assets than total liabilities.

This surplus suggests that Boku has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Boku has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Boku turned things around in the last 12 months, delivering and EBIT of US$2.8m. 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 Boku'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Boku may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Boku actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Boku has net cash of US$60.4m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$13m, being 485% of its EBIT. So we don't think Boku's use of debt is risky. 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. For example, we've discovered 3 warning signs for Boku that you should be aware of before investing here.

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.

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