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David Iben put it well when he said, ‘Volatility is not a risk we care about. What we care about is avoiding the 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. We note that Bottomline Technologies (de), Inc. (NASDAQ:EPAY) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. The first step when considering a company’s debt levels is to consider its cash and debt together.
What Is Bottomline Technologies (de)’s Net Debt?
You can click the graphic below for the historical numbers, but it shows that Bottomline Technologies (de) had US$110.0m of debt in March 2019, down from US$150.0m, one year before On the flip side, it has US$88.4m in cash leading to net debt of about US$21.6m.
A Look At Bottomline Technologies (de)’s Liabilities
The latest balance sheet data shows that Bottomline Technologies (de) had liabilities of US$128.2m due within a year, and liabilities of US$157.4m falling due after that. On the other hand, it had cash of US$88.4m and US$76.2m worth of receivables due within a year. So its liabilities total US$120.9m more than the combination of its cash and short-term receivables.
Of course, Bottomline Technologies (de) has a market capitalization of US$1.89b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Carrying virtually no net debt, Bottomline Technologies (de) has a very light debt load indeed.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
Bottomline Technologies (de) has a very low debt to EBITDA ratio of 0.48 so it is strange to see weak interest coverage, with last year’s EBIT being only 2.45 times the interest expense. So while we’re not necessarily alarmed we think that its debt is far from trivial. Notably, Bottomline Technologies (de)’s EBIT launched higher than Elon Musk, gaining a whopping 325% on last year. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Bottomline Technologies (de)’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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Happily for any shareholders, Bottomline Technologies (de) actually produced more free cash flow than EBIT over the last two years. That sort of strong cash conversion gets us excited like the crowd when the beat drops at a Daft Punk concert.
The good news is that Bottomline Technologies (de)’s demonstrated ability to convert EBIT to free cash flow delights us like a fluffy puppy does a toddler. But we must concede we find its interest cover has the opposite effect. Zooming out, Bottomline Technologies (de) seems to use debt quite reasonably; and that gets the nod from us. While debt does bring risk, when used wisely it can also bring a higher return on equity. We’d be motivated to research the stock further if we found out that Bottomline Technologies (de) insiders have bought shares recently. If you would too, then you’re in luck, since today we’re sharing our list of reported insider transactions for free.
If you’re interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.