Bandwidth (NASDAQ:BAND) Has Debt But No Earnings; Should You Worry?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Bandwidth Inc. (NASDAQ:BAND) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Our analysis indicates that BAND is potentially undervalued!

How Much Debt Does Bandwidth Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Bandwidth had US$636.5m of debt, an increase on US$472.0m, over one year. However, it also had US$302.9m in cash, and so its net debt is US$333.6m.

How Strong Is Bandwidth's Balance Sheet?

We can see from the most recent balance sheet that Bandwidth had liabilities of US$101.7m falling due within a year, and liabilities of US$702.8m due beyond that. On the other hand, it had cash of US$302.9m and US$76.6m worth of receivables due within a year. So it has liabilities totalling US$425.0m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the US$236.6m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Bandwidth would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Bandwidth's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Bandwidth wasn't profitable at an EBIT level, but managed to grow its revenue by 21%, to US$525m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Bandwidth managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at US$19m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of US$4.0m over the last twelve months. That means it's on the risky side of things. 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 2 warning signs for Bandwidth that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.