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.' 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. We note that 8x8, Inc. (NASDAQ:EGHT) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for 8x8

What Is 8x8's Net Debt?

As you can see below, 8x8 had US$396.9m of debt at September 2024, down from US$470.8m a year prior. On the flip side, it has US$117.4m in cash leading to net debt of about US$279.5m.

How Healthy Is 8x8's Balance Sheet?

We can see from the most recent balance sheet that 8x8 had liabilities of US$208.8m falling due within a year, and liabilities of US$421.5m due beyond that. Offsetting these obligations, it had cash of US$117.4m as well as receivables valued at US$72.7m due within 12 months. So its liabilities total US$440.2m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of US$407.7m, 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. When analysing debt levels, the balance sheet is the obvious place to start. 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.

In the last year 8x8 had a loss before interest and tax, and actually shrunk its revenue by 2.4%, to US$720m. 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$6.8m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of US$70m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - 8x8 has 3 warning signs we think 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.