Is Benefitfocus (NASDAQ:BNFT) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Benefitfocus, Inc. (NASDAQ:BNFT) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Benefitfocus

What Is Benefitfocus's Debt?

As you can see below, Benefitfocus had US$181.5m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$176.0m in cash offsetting this, leading to net debt of about US$5.44m.

How Healthy Is Benefitfocus's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Benefitfocus had liabilities of US$60.9m due within 12 months and liabilities of US$270.5m due beyond that. Offsetting these obligations, it had cash of US$176.0m as well as receivables valued at US$36.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$118.6m.

This deficit isn't so bad because Benefitfocus is worth US$454.7m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Carrying virtually no net debt, Benefitfocus has a very light debt load indeed. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Benefitfocus can strengthen its balance sheet over time. 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 Benefitfocus's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Importantly, Benefitfocus had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$3.8m at the EBIT level. 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. For example, we would not want to see a repeat of last year's loss of US$33m. So we do think this stock is quite 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. Consider risks, for instance. Every company has them, and we've spotted 2 warning signs for Benefitfocus you should know about.

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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