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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Medallia, Inc. (NYSE:MDLA) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Medallia's Net Debt?
As you can see below, at the end of January 2021, Medallia had US$448.1m of debt, up from none a year ago. Click the image for more detail. But it also has US$682.4m in cash to offset that, meaning it has US$234.3m net cash.
How Strong Is Medallia's Balance Sheet?
The latest balance sheet data shows that Medallia had liabilities of US$387.2m due within a year, and liabilities of US$506.2m falling due after that. On the other hand, it had cash of US$682.4m and US$181.4m worth of receivables due within a year. So it has liabilities totalling US$29.6m more than its cash and near-term receivables, combined.
This state of affairs indicates that Medallia'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$4.03b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Medallia boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Medallia'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 Medallia wasn't profitable at an EBIT level, but managed to grow its revenue by 19%, to US$477m. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is Medallia?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Medallia had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$19m of cash and made a loss of US$149m. But the saving grace is the US$234.3m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 5 warning signs for Medallia (1 makes us a bit uncomfortable!) that you should be aware of before investing here.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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