Is 8x8 (NASDAQ:EGHT) Using Debt In A Risky Way?

Warren Buffett famously said, '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 can see that 8x8, Inc. (NASDAQ:EGHT) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for 8x8

How Much Debt Does 8x8 Carry?

As you can see below, 8x8 had US$470.8m of debt at September 2023, down from US$516.7m a year prior. However, it also had US$148.8m in cash, and so its net debt is US$322.0m.

A Look At 8x8's Liabilities

We can see from the most recent balance sheet that 8x8 had liabilities of US$229.1m falling due within a year, and liabilities of US$484.2m due beyond that. On the other hand, it had cash of US$148.8m and US$72.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$492.2m.

Given this deficit is actually higher than the company's market capitalization of US$445.9m, 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. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine 8x8's ability to maintain a healthy balance sheet going forward. 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 3.4%, to US$737m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months 8x8 produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$19m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of US$58m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - 8x8 has 4 warning signs we think you should be aware of.

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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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.