Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, DocuSign, Inc. (NASDAQ:DOCU) does carry debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is DocuSign's Net Debt?
As you can see below, at the end of April 2021, DocuSign had US$755.9m of debt, up from US$472.2m a year ago. Click the image for more detail. But it also has US$780.6m in cash to offset that, meaning it has US$24.7m net cash.
How Healthy Is DocuSign's Balance Sheet?
According to the last reported balance sheet, DocuSign had liabilities of US$1.10b due within 12 months, and liabilities of US$956.0m due beyond 12 months. Offsetting these obligations, it had cash of US$780.6m as well as receivables valued at US$265.6m due within 12 months. So its liabilities total US$1.01b more than the combination of its cash and short-term receivables.
This state of affairs indicates that DocuSign's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$58.1b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, DocuSign boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine DocuSign'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.
Over 12 months, DocuSign reported revenue of US$1.6b, which is a gain of 54%, 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 DocuSign?
Although DocuSign had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$305m. 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 DocuSign 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. 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. Case in point: We've spotted 3 warning signs for DocuSign 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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