Warren Buffett famously said, ‘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. As with many other companies Extreme Networks, Inc. (NASDAQ:EXTR) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company’s use of debt, we first look at cash and debt together.
How Much Debt Does Extreme Networks Carry?
As you can see below, Extreme Networks had US$178.8m of debt at June 2019, down from US$197.8m a year prior. However, it does have US$169.6m in cash offsetting this, leading to net debt of about US$9.14m.
How Healthy Is Extreme Networks’s Balance Sheet?
We can see from the most recent balance sheet that Extreme Networks had liabilities of US$356.0m falling due within a year, and liabilities of US$284.9m due beyond that. Offsetting this, it had US$169.6m in cash and US$174.4m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$296.9m.
While this might seem like a lot, it is not so bad since Extreme Networks has a market capitalization of US$815.1m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. But either way, Extreme Networks has virtually no net debt, so it’s fair to say it does not have a heavy debt load! 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 Extreme Networks’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.
In the last year Extreme Networks’s revenue was pretty flat. While that hardly impresses, its not too bad either.
Importantly, Extreme Networks had negative earnings before interest and tax (EBIT), over the last year. To be specific the EBIT loss came in at US$4.4m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year’s loss of-US$25.9m. In the meantime, we consider the stock very risky. For riskier companies like Extreme Networks I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
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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