Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies BlackLine, Inc. (NASDAQ:BL) makes use of debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
What Is BlackLine's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2020 BlackLine had US$401.2m of debt, an increase on US$378.9m, over one year. However, it does have US$525.5m in cash offsetting this, leading to net cash of US$124.3m.
How Strong Is BlackLine's Balance Sheet?
According to the last reported balance sheet, BlackLine had liabilities of US$203.5m due within 12 months, and liabilities of US$418.1m due beyond 12 months. On the other hand, it had cash of US$525.5m and US$91.1m worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.
Having regard to BlackLine's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$6.34b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, BlackLine 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 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.
Over 12 months, BlackLine reported revenue of US$337m, which is a gain of 24%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is BlackLine?
Although BlackLine had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$33m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. The good news for BlackLine shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But that doesn't change our opinion that the stock is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 4 warning signs we've spotted with BlackLine .
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.
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