Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Proofpoint, Inc. (NASDAQ:PFPT) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. If things get really bad, the lenders can take control of the business. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.
What Is Proofpoint's Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2020 Proofpoint had US$774.9m of debt, an increase on US$741.4m, over one year. But on the other hand it also has US$1.02b in cash, leading to a US$244.6m net cash position.
A Look At Proofpoint's Liabilities
We can see from the most recent balance sheet that Proofpoint had liabilities of US$782.8m falling due within a year, and liabilities of US$1.04b due beyond that. Offsetting this, it had US$1.02b in cash and US$180.9m in receivables that were due within 12 months. So its liabilities total US$620.4m more than the combination of its cash and short-term receivables.
Given Proofpoint has a market capitalization of US$7.90b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Proofpoint 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 Proofpoint 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 Proofpoint wasn't profitable at an EBIT level, but managed to grow its revenue by 21%, to US$1.0b. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Proofpoint?
Although Proofpoint had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$228m. 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 Proofpoint is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But that doesn't change our opinion that the stock is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Proofpoint is showing 3 warning signs in our investment analysis , you should know about...
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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