Is Upland Software (NASDAQ:UPLD) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Upland Software, Inc. (NASDAQ:UPLD) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Upland Software

How Much Debt Does Upland Software Carry?

The image below, which you can click on for greater detail, shows that Upland Software had debt of US$297.3m at the end of September 2024, a reduction from US$477.5m over a year. However, it does have US$59.7m in cash offsetting this, leading to net debt of about US$237.6m.

A Look At Upland Software's Liabilities

We can see from the most recent balance sheet that Upland Software had liabilities of US$119.0m falling due within a year, and liabilities of US$313.2m due beyond that. Offsetting these obligations, it had cash of US$59.7m as well as receivables valued at US$38.3m due within 12 months. So its liabilities total US$334.2m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the US$116.9m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Upland Software would likely require a major re-capitalisation if it had to pay its creditors today. 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 Upland Software 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.

In the last year Upland Software had a loss before interest and tax, and actually shrunk its revenue by 8.4%, to US$279m. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Upland Software produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping US$22m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely since it is low on liquid assets, and made a loss of US$131m in the last year. So while it's not wise to assume the company will fail, we do think it's 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. To that end, you should be aware of the 2 warning signs we've spotted with Upland Software .

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.