Here's Why Fastly (NYSE:FSLY) Can Afford Some Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Fastly, Inc. (NYSE:FSLY) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Fastly

What Is Fastly's Debt?

The image below, which you can click on for greater detail, shows that Fastly had debt of US$344.2m at the end of June 2024, a reduction from US$472.4m over a year. However, because it has a cash reserve of US$311.8m, its net debt is less, at about US$32.4m.

A Look At Fastly's Liabilities

According to the last reported balance sheet, Fastly had liabilities of US$109.3m due within 12 months, and liabilities of US$392.2m due beyond 12 months. Offsetting this, it had US$311.8m in cash and US$113.9m in receivables that were due within 12 months. So it has liabilities totalling US$75.8m more than its cash and near-term receivables, combined.

Of course, Fastly has a market capitalization of US$1.06b, so these liabilities are probably manageable. 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 Fastly 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 Fastly wasn't profitable at an EBIT level, but managed to grow its revenue by 14%, to US$531m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Fastly had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping US$183m. 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$41m of cash over the last year. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. 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 Fastly .

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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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.