Stock Analysis

Would Fastly (NYSE:FSLY) Be Better Off With Less Debt?

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NYSE:FSLY
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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.' 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. Importantly, Fastly, Inc. (NYSE:FSLY) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Fastly

What Is Fastly's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Fastly had US$932.3m of debt, an increase on US$20.1m, over one year. On the flip side, it has US$643.4m in cash leading to net debt of about US$288.9m.

debt-equity-history-analysis
NYSE:FSLY Debt to Equity History December 26th 2021

How Strong Is Fastly's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Fastly had liabilities of US$107.3m due within 12 months and liabilities of US$1.02b due beyond that. Offsetting this, it had US$643.4m in cash and US$54.2m in receivables that were due within 12 months. So it has liabilities totalling US$425.7m more than its cash and near-term receivables, combined.

Since publicly traded Fastly shares are worth a total of US$4.63b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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 Fastly 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.

In the last year Fastly wasn't profitable at an EBIT level, but managed to grow its revenue by 27%, to US$339m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Fastly's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost US$198m 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$113m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 5 warning signs with Fastly (at least 1 which is concerning) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

What are the risks and opportunities for Fastly?

Fastly, Inc. operates an edge cloud platform for processing, serving, and securing its customer’s applications in the United States, the Asia Pacific, Europe, and internationally.

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Rewards

  • Revenue is forecast to grow 15.06% per year

Risks

  • Shareholders have been diluted in the past year

  • 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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