We Think Coupa Software (NASDAQ:COUP) Has A Fair Chunk Of Debt

By
Simply Wall St
Published
April 23, 2022
NasdaqGS:COUP
Source: Shutterstock

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Coupa Software Incorporated (NASDAQ:COUP) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Coupa Software

What Is Coupa Software's Net Debt?

The image below, which you can click on for greater detail, shows that at January 2022 Coupa Software had debt of US$1.62b, up from US$1.51b in one year. However, it also had US$729.5m in cash, and so its net debt is US$886.4m.

debt-equity-history-analysis
NasdaqGS:COUP Debt to Equity History April 23rd 2022

How Strong Is Coupa Software's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Coupa Software had liabilities of US$567.0m due within 12 months and liabilities of US$1.72b due beyond that. On the other hand, it had cash of US$729.5m and US$226.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.33b.

Since publicly traded Coupa Software shares are worth a total of US$6.72b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Coupa Software's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Coupa Software wasn't profitable at an EBIT level, but managed to grow its revenue by 34%, to US$725m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Coupa Software still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$244m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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$379m. So to be blunt we do think it is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Coupa Software (of which 1 is a bit concerning!) you should know about.

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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