Stock Analysis

Is 8x8 (NASDAQ:EGHT) Using Too Much Debt?

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NasdaqGS:EGHT
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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.' 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. We note that 8x8, Inc. (NASDAQ:EGHT) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

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What Is 8x8's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 8x8 had US$516.7m of debt, an increase on US$317.3m, over one year. However, it does have US$130.9m in cash offsetting this, leading to net debt of about US$385.8m.

debt-equity-history-analysis
NasdaqGS:EGHT Debt to Equity History December 5th 2022

How Strong Is 8x8's Balance Sheet?

According to the last reported balance sheet, 8x8 had liabilities of US$169.0m due within 12 months, and liabilities of US$602.2m due beyond 12 months. On the other hand, it had cash of US$130.9m and US$70.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$569.5m.

When you consider that this deficiency exceeds the company's US$531.6m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. 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're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year 8x8 wasn't profitable at an EBIT level, but managed to grow its revenue by 23%, to US$713m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though 8x8 managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost a very considerable US$120m at the EBIT level. 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. For example, we would not want to see a repeat of last year's loss of US$127m. 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. To that end, you should be aware of the 3 warning signs we've spotted with 8x8 .

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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