Does Bandwidth (NASDAQ:BAND) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Bandwidth Inc. (NASDAQ:BAND) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Bandwidth

How Much Debt Does Bandwidth Carry?

The image below, which you can click on for greater detail, shows that Bandwidth had debt of US$418.5m at the end of December 2023, a reduction from US$480.5m over a year. However, it also had US$153.5m in cash, and so its net debt is US$265.1m.

A Look At Bandwidth's Liabilities

We can see from the most recent balance sheet that Bandwidth had liabilities of US$122.8m falling due within a year, and liabilities of US$680.9m due beyond that. Offsetting this, it had US$153.5m in cash and US$78.5m in receivables that were due within 12 months. So it has liabilities totalling US$571.7m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of US$505.9m, we think shareholders really should watch Bandwidth's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. 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 Bandwidth'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 Bandwidth wasn't profitable at an EBIT level, but managed to grow its revenue by 4.9%, to US$601m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Bandwidth produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$35m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of US$16m. In the meantime, we 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 4 warning signs for Bandwidth (1 is a bit concerning) 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.