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.' 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. Importantly, RingCentral, Inc. (NYSE:RNG) does carry debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
What Is RingCentral's Debt?
The image below, which you can click on for greater detail, shows that at March 2021 RingCentral had debt of US$1.37b, up from US$1.04b in one year. However, it does have US$463.1m in cash offsetting this, leading to net debt of about US$908.5m.
A Look At RingCentral's Liabilities
According to the last reported balance sheet, RingCentral had liabilities of US$444.4m due within 12 months, and liabilities of US$1.41b due beyond 12 months. On the other hand, it had cash of US$463.1m and US$166.9m worth of receivables due within a year. So it has liabilities totalling US$1.23b more than its cash and near-term receivables, combined.
Given RingCentral has a humongous market capitalization of US$27.0b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 RingCentral 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 RingCentral wasn't profitable at an EBIT level, but managed to grow its revenue by 31%, to US$1.3b. With any luck the company will be able to grow its way to profitability.
While we can certainly appreciate RingCentral's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at US$131m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$132m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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 instance, we've identified 3 warning signs for RingCentral that you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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