New Relic (NYSE:NEWR) Has Debt But No Earnings; Should You Worry?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, New Relic, Inc. (NYSE:NEWR) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for New Relic

What Is New Relic's Debt?

As you can see below, New Relic had US$498.9m of debt, at September 2022, which is about the same as the year before. You can click the chart for greater detail. But it also has US$833.3m in cash to offset that, meaning it has US$334.5m net cash.

A Look At New Relic's Liabilities

According to the last reported balance sheet, New Relic had liabilities of US$900.1m due within 12 months, and liabilities of US$62.9m due beyond 12 months. Offsetting these obligations, it had cash of US$833.3m as well as receivables valued at US$112.6m due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to New Relic's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$4.19b company is struggling for cash, we still think it's worth monitoring its 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. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine New Relic's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, New Relic reported revenue of US$853m, which is a gain of 19%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

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$16m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for New Relic that you should be aware of before investing here.

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.