Health Check: How Prudently Does Proofpoint (NASDAQ:PFPT) Use Debt?

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 Proofpoint, Inc. (NASDAQ:PFPT) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Proofpoint

How Much Debt Does Proofpoint Carry?

The image below, which you can click on for greater detail, shows that at June 2020 Proofpoint had debt of US$766.4m, up from none in one year. However, it does have US$973.3m in cash offsetting this, leading to net cash of US$206.9m.

How Healthy Is Proofpoint's Balance Sheet?

According to the last reported balance sheet, Proofpoint had liabilities of US$743.5m due within 12 months, and liabilities of US$1.02b due beyond 12 months. Offsetting this, it had US$973.3m in cash and US$173.1m in receivables that were due within 12 months. So it has liabilities totalling US$614.3m more than its cash and near-term receivables, combined.

Of course, Proofpoint has a market capitalization of US$6.33b, so these liabilities are probably manageable. 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Proofpoint'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 Proofpoint wasn't profitable at an EBIT level, but managed to grow its revenue by 22%, to US$979m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Proofpoint?

While Proofpoint lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$222m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. 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 we still think it's somewhat risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Proofpoint , and understanding them should be part of your investment process.

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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