Here's Why BlackLine (NASDAQ:BL) Can Afford Some Debt

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 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. Importantly, BlackLine, Inc. (NASDAQ:BL) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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.

Check out our latest analysis for BlackLine

What Is BlackLine's Debt?

As you can see below, at the end of December 2022, BlackLine had US$1.38b of debt, up from US$1.11b a year ago. Click the image for more detail. However, it does have US$1.08b in cash offsetting this, leading to net debt of about US$309.3m.

How Strong Is BlackLine's Balance Sheet?

We can see from the most recent balance sheet that BlackLine had liabilities of US$367.8m falling due within a year, and liabilities of US$1.44b due beyond that. Offsetting these obligations, it had cash of US$1.08b as well as receivables valued at US$150.9m due within 12 months. So it has liabilities totalling US$582.0m more than its cash and near-term receivables, combined.

Of course, BlackLine has a market capitalization of US$3.36b, 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. 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 BlackLine'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 BlackLine wasn't profitable at an EBIT level, but managed to grow its revenue by 23%, to US$523m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, BlackLine still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$65m. 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. We would feel better if it turned its trailing twelve month loss of US$29m into a profit. So to be blunt we do think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for BlackLine that you should be aware of.

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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