Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Proofpoint, Inc. (NASDAQ:PFPT) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
What Is Proofpoint's Debt?
As you can see below, at the end of December 2020, Proofpoint had US$783.6m of debt, up from US$749.6m a year ago. Click the image for more detail. However, it does have US$910.3m in cash offsetting this, leading to net cash of US$126.7m.
How Healthy Is Proofpoint's Balance Sheet?
The latest balance sheet data shows that Proofpoint had liabilities of US$865.2m due within a year, and liabilities of US$1.19b falling due after that. On the other hand, it had cash of US$910.3m and US$255.4m worth of receivables due within a year. So its liabilities total US$891.3m more than the combination of its cash and short-term receivables.
Given Proofpoint has a market capitalization of US$7.54b, 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Proofpoint can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Proofpoint reported revenue of US$1.1b, which is a gain of 18%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
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$192m. 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. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Proofpoint that you should be aware of before investing here.
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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