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

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.' 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 note that New Relic, Inc. (NYSE:NEWR) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for New Relic

What Is New Relic's Debt?

As you can see below, New Relic had US$500.0m of debt, at March 2023, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds US$879.8m in cash, so it actually has US$379.8m net cash.

How Healthy Is New Relic's Balance Sheet?

We can see from the most recent balance sheet that New Relic had liabilities of US$988.4m falling due within a year, and liabilities of US$67.1m due beyond that. On the other hand, it had cash of US$879.8m and US$234.3m worth of receivables due within a year. So it can boast US$58.6m more liquid assets than total liabilities.

This state of affairs indicates that New Relic'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$4.90b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that New Relic has more cash than debt is arguably a good indication that it can manage its debt safely. 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 New Relic 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 New Relic wasn't profitable at an EBIT level, but managed to grow its revenue by 18%, to US$926m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is New Relic?

Although New Relic had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$34m. 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. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for New Relic that you should be aware of.

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.

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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.