Is New Relic (NYSE:NEWR) Weighed On By Its Debt Load?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 New Relic, Inc. (NYSE:NEWR) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for New Relic

What Is New Relic's Debt?

The chart below, which you can click on for greater detail, shows that New Relic had US$498.3m in debt in June 2022; about the same as the year before. However, its balance sheet shows it holds US$867.3m in cash, so it actually has US$369.1m net cash.

How Healthy Is New Relic's Balance Sheet?

The latest balance sheet data shows that New Relic had liabilities of US$946.1m due within a year, and liabilities of US$64.2m falling due after that. Offsetting these obligations, it had cash of US$867.3m as well as receivables valued at US$109.6m due within 12 months. So it has liabilities totalling US$33.4m more than its cash and near-term receivables, combined.

Having regard to New Relic's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$4.55b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, New Relic also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 New Relic 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 New Relic wasn't profitable at an EBIT level, but managed to grow its revenue by 20%, to US$821m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is New Relic?

While New Relic lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$19m. 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. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for New Relic you should know about.

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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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.