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. So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that MongoDB, Inc. (NASDAQ:MDB) does use debt in its business. But the real question is whether this debt is making the company risky.
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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.
What Is MongoDB's Debt?
The image below, which you can click on for greater detail, shows that at July 2019 MongoDB had debt of US$223.4m, up from US$210.6m in one year. However, its balance sheet shows it holds US$436.1m in cash, so it actually has US$212.7m net cash.
A Look At MongoDB's Liabilities
The latest balance sheet data shows that MongoDB had liabilities of US$189.0m due within a year, and liabilities of US$313.3m falling due after that. Offsetting this, it had US$436.1m in cash and US$66.8m in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.
Having regard to MongoDB's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$7.14b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that MongoDB has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine MongoDB'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.
Over 12 months, MongoDB reported revenue of US$346m, which is a gain of 67%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is MongoDB?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year MongoDB had negative earnings before interest and tax (EBIT), truth be told. And over the same period it saw negative free cash outflow of US$33m and booked a US$115m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$212.7m. That means it could keep spending at its current rate for more than two years. MongoDB's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting MongoDB insider transactions.
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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