Rapid7 (NASDAQ:RPD) Is Making Moderate Use Of Debt

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 Rapid7, Inc. (NASDAQ:RPD) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Rapid7

What Is Rapid7's Debt?

As you can see below, at the end of September 2020, Rapid7 had US$373.3m of debt, up from US$182.5m a year ago. Click the image for more detail. However, because it has a cash reserve of US$320.6m, its net debt is less, at about US$52.7m.

How Strong Is Rapid7's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Rapid7 had liabilities of US$298.3m due within 12 months and liabilities of US$483.2m due beyond that. Offsetting these obligations, it had cash of US$320.6m as well as receivables valued at US$75.6m due within 12 months. So it has liabilities totalling US$385.2m more than its cash and near-term receivables, combined.

Given Rapid7 has a market capitalization of US$3.83b, 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. But either way, Rapid7 has virtually no net debt, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Rapid7 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.

Over 12 months, Rapid7 reported revenue of US$390m, which is a gain of 28%, 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.

Caveat Emptor

Despite the top line growth, Rapid7 still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$63m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$3.2m of cash over the last year. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Consider risks, for instance. Every company has them, and we've spotted 2 warning signs for Rapid7 you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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