Stock Analysis

Is 8x8 (NYSE:EGHT) Using Too Much Debt?

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NasdaqGS:EGHT
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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that 8x8, Inc. (NYSE:EGHT) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for 8x8

How Much Debt Does 8x8 Carry?

The image below, which you can click on for greater detail, shows that at June 2021 8x8 had debt of US$312.8m, up from US$295.7m in one year. However, because it has a cash reserve of US$140.5m, its net debt is less, at about US$172.3m.

debt-equity-history-analysis
NYSE:EGHT Debt to Equity History August 18th 2021

How Healthy Is 8x8's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that 8x8 had liabilities of US$121.2m due within 12 months and liabilities of US$397.7m due beyond that. On the other hand, it had cash of US$140.5m and US$49.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$328.6m.

Given 8x8 has a market capitalization of US$2.68b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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 8x8 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, 8x8 reported revenue of US$559m, which is a gain of 19%, although it did not report any earnings before interest and tax. 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. Indeed, it lost US$148m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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$32m of cash over the last year. So to be blunt we think it is risky. 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. To that end, you should be aware of the 3 warning signs we've spotted with 8x8 .

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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What are the risks and opportunities for 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.

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Rewards

  • Trading at 72% below our estimate of its fair value

Risks

  • Significant insider selling over the past 3 months

  • Currently unprofitable and not forecast to become profitable over the next 3 years

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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.

Undervalued with mediocre balance sheet.