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. We note that 8x8, Inc. (NYSE:EGHT) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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.
What Is 8x8's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2020 8x8 had US$304.1m of debt, an increase on US$287.5m, over one year. However, it does have US$148.6m in cash offsetting this, leading to net debt of about US$155.5m.
How Healthy Is 8x8's Balance Sheet?
According to the last reported balance sheet, 8x8 had liabilities of US$127.8m due within 12 months, and liabilities of US$397.7m due beyond 12 months. On the other hand, it had cash of US$148.6m and US$68.8m worth of receivables due within a year. So it has liabilities totalling US$308.0m more than its cash and near-term receivables, combined.
Given 8x8 has a market capitalization of US$3.58b, 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine 8x8'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 8x8 wasn't profitable at an EBIT level, but managed to grow its revenue by 22%, to US$509m. With any luck the company will be able to grow its way to profitability.
Even though 8x8 managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at US$150m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$96m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be 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. Case in point: We've spotted 3 warning signs for 8x8 you should be aware of.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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8x8, Inc. provides voice, video, chat, contact center, and enterprise-class application programmable interface (API) Software-as-a-Service solutions for small and mid-size businesses, mid-market and larger enterprises, government agencies, and other organizations worldwide.
Undervalued with mediocre balance sheet.