Stock Analysis

Here's Why 8x8 (NYSE:EGHT) Can Afford Some Debt

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NasdaqGS:EGHT
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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.' 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. Importantly, 8x8, Inc. (NYSE:EGHT) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for 8x8

How Much Debt Does 8x8 Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 8x8 had US$441.0m of debt, an increase on US$304.1m, over one year. However, because it has a cash reserve of US$244.9m, its net debt is less, at about US$196.1m.

debt-equity-history-analysis
NYSE:EGHT Debt to Equity History April 16th 2022

How Healthy Is 8x8's Balance Sheet?

According to the last reported balance sheet, 8x8 had liabilities of US$121.5m due within 12 months, and liabilities of US$517.2m due beyond 12 months. Offsetting this, it had US$244.9m in cash and US$59.4m in receivables that were due within 12 months. So its liabilities total US$334.4m more than the combination of its cash and short-term receivables.

8x8 has a market capitalization of US$1.30b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 18%, to US$601m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months 8x8 produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping US$148m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$7.0m 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. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 5 warning signs with 8x8 (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

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.

Valuation is complex, but we're helping make it simple.

Find out whether 8x8 is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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About NasdaqGS:EGHT

8x8

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.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation5
Future Growth1
Past Performance0
Financial Health3
Dividends0

Read more about these checks in the individual report sections or in our analysis model.

Undervalued with mediocre balance sheet.