The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Bill.com Holdings, Inc. (NYSE:BILL) does use debt in its business. But the real question is whether this debt is making the company risky.
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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Bill.com Holdings's Net Debt?
The image below, which you can click on for greater detail, shows that at September 2020 Bill.com Holdings had debt of US$2.30m, up from none in one year. However, it does have US$700.3m in cash offsetting this, leading to net cash of US$698.0m.
How Strong Is Bill.com Holdings' Balance Sheet?
According to the last reported balance sheet, Bill.com Holdings had liabilities of US$1.70b due within 12 months, and liabilities of US$58.1m due beyond 12 months. Offsetting this, it had US$700.3m in cash and US$12.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.05b.
Since publicly traded Bill.com Holdings shares are worth a very impressive total of US$10.4b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Bill.com Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Bill.com Holdings 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, Bill.com Holdings reported revenue of US$169m, which is a gain of 39%, 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.
So How Risky Is Bill.com Holdings?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Bill.com Holdings had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$21m of cash and made a loss of US$38m. While this does make the company a bit risky, it's important to remember it has net cash of US$698.0m. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, Bill.com Holdings may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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 instance, we've identified 3 warning signs for Bill.com Holdings that you should be aware of.
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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