Is 8x8 (NASDAQ:EGHT) A Risky Investment?

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. As with many other companies 8x8, Inc. (NASDAQ:EGHT) makes use of debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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 8x8

What Is 8x8's Net Debt?

As you can see below, 8x8 had US$409.7m of debt at March 2024, down from US$491.7m a year prior. However, it also had US$117.3m in cash, and so its net debt is US$292.4m.

How Healthy Is 8x8's Balance Sheet?

The latest balance sheet data shows that 8x8 had liabilities of US$172.6m due within a year, and liabilities of US$481.4m falling due after that. Offsetting these obligations, it had cash of US$117.3m as well as receivables valued at US$68.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$468.3m.

Given this deficit is actually higher than the company's market capitalization of US$373.7m, we think shareholders really should watch 8x8's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if 8x8 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.

Over 12 months, 8x8 made a loss at the EBIT level, and saw its revenue drop to US$729m, which is a fall of 2.0%. We would much prefer see growth.

Caveat Emptor

Importantly, 8x8 had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$17m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of US$68m. In the meantime, we consider the stock to be 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. Case in point: We've spotted 4 warning signs for 8x8 you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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