Health Check: How Prudently Does Bandwidth (NASDAQ:BAND) Use Debt?

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.' 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. We can see that Bandwidth Inc. (NASDAQ:BAND) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Bandwidth

What Is Bandwidth's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Bandwidth had US$306.0m of debt in September 2024, down from US$418.0m, one year before. However, it does have US$79.9m in cash offsetting this, leading to net debt of about US$226.1m.

How Strong Is Bandwidth's Balance Sheet?

The latest balance sheet data shows that Bandwidth had liabilities of US$153.7m due within a year, and liabilities of US$539.5m falling due after that. Offsetting these obligations, it had cash of US$79.9m as well as receivables valued at US$99.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$513.7m.

This is a mountain of leverage relative to its market capitalization of US$527.4m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 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 19%, to US$704m. 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$27m. 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. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of US$16m into a profit. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Bandwidth .

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.