Does Five9 (NASDAQ:FIVN) Have A Healthy Balance Sheet?

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, Five9, Inc. (NASDAQ:FIVN) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Five9

What Is Five9's Debt?

The chart below, which you can click on for greater detail, shows that Five9 had US$740.2m in debt in June 2023; about the same as the year before. However, it also had US$659.8m in cash, and so its net debt is US$80.4m.

How Healthy Is Five9's Balance Sheet?

The latest balance sheet data shows that Five9 had liabilities of US$158.3m due within a year, and liabilities of US$785.9m falling due after that. Offsetting this, it had US$659.8m in cash and US$91.3m in receivables that were due within 12 months. So its liabilities total US$193.0m more than the combination of its cash and short-term receivables.

Given Five9 has a market capitalization of US$4.68b, 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. 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 Five9'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 Five9 wasn't profitable at an EBIT level, but managed to grow its revenue by 21%, to US$848m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Five9 still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$77m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of US$86m into a profit. So we do think this stock is quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Five9 you should know about.

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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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.