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. Importantly, FireEye, Inc. (NASDAQ:FEYE) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, 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 FireEye's Debt?
The image below, which you can click on for greater detail, shows that FireEye had debt of US$960.9m at the end of December 2020, a reduction from US$1.01b over a year. However, its balance sheet shows it holds US$1.30b in cash, so it actually has US$340.4m net cash.
A Look At FireEye's Liabilities
According to the last reported balance sheet, FireEye had liabilities of US$753.7m due within 12 months, and liabilities of US$1.36b due beyond 12 months. Offsetting this, it had US$1.30b in cash and US$153.6m in receivables that were due within 12 months. So its liabilities total US$657.1m more than the combination of its cash and short-term receivables.
Given FireEye has a market capitalization of US$4.58b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, FireEye boasts net cash, so it's fair to say it does not have a heavy debt load! 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 FireEye can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year FireEye wasn't profitable at an EBIT level, but managed to grow its revenue by 5.8%, to US$941m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is FireEye?
While FireEye lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$69m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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, we've discovered 3 warning signs for FireEye that you should be aware of before investing here.
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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