Is HubSpot (NYSE:HUBS) A Risky Investment?

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.' 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. We can see that HubSpot, Inc. (NYSE:HUBS) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Our analysis indicates that HUBS is potentially undervalued!

What Is HubSpot's Net Debt?

The chart below, which you can click on for greater detail, shows that HubSpot had US$453.2m in debt in June 2022; about the same as the year before. But it also has US$1.25b in cash to offset that, meaning it has US$792.8m net cash.

How Strong Is HubSpot's Balance Sheet?

We can see from the most recent balance sheet that HubSpot had liabilities of US$662.2m falling due within a year, and liabilities of US$740.3m due beyond that. Offsetting these obligations, it had cash of US$1.25b as well as receivables valued at US$166.0m due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that HubSpot's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$14.0b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, HubSpot boasts net cash, so it's fair to say it does not have a heavy debt load! 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 HubSpot 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 HubSpot wasn't profitable at an EBIT level, but managed to grow its revenue by 42%, to US$1.5b. With any luck the company will be able to grow its way to profitability.

So How Risky Is HubSpot?

Although HubSpot had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$178m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Keeping in mind its 42% revenue growth over the last year, we think there's a decent chance the company is on track. We'd see further strong growth as an optimistic indication. 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. For example, we've discovered 2 warning signs for HubSpot that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.