Warren Buffett famously said, ‘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 note that Mimecast Limited (NASDAQ:MIME) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Mimecast’s Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Mimecast had US$96.4m of debt, an increase on US$72.9m, over one year. But on the other hand it also has US$196.8m in cash, leading to a US$100.5m net cash position.
How Healthy Is Mimecast’s Balance Sheet?
According to the last reported balance sheet, Mimecast had liabilities of US$241.1m due within 12 months, and liabilities of US$230.7m due beyond 12 months. Offsetting this, it had US$196.8m in cash and US$68.5m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$206.5m.
Of course, Mimecast has a market capitalization of US$2.68b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Mimecast also has more cash than debt, so we’re pretty confident it can manage its debt safely. There’s no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Mimecast can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Mimecast managed to grow its revenue by 28%, to US$361m. With any luck the company will be able to grow its way to profitability.
So How Risky Is Mimecast?
Although Mimecast had negative earnings before interest and tax (EBIT) over the last twelve months, it generated positive free cash flow of US$48m. 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. One positive is that Mimecast is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But we still think it’s somewhat risky. For riskier companies like Mimecast I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
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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