Is Bandwidth (NASDAQ:BAND) Using Debt In A Risky Way?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. 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?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Bandwidth

How Much Debt Does Bandwidth Carry?

As you can see below, Bandwidth had US$417.1m of debt at March 2023, down from US$635.7m a year prior. However, it does have US$123.5m in cash offsetting this, leading to net debt of about US$293.6m.

A Look At Bandwidth's Liabilities

Zooming in on the latest balance sheet data, we can see that Bandwidth had liabilities of US$95.0m due within 12 months and liabilities of US$476.7m due beyond that. On the other hand, it had cash of US$123.5m and US$63.2m worth of receivables due within a year. So it has liabilities totalling US$385.0m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's US$346.6m market capitalization, you might well be inclined to review the balance sheet intently. 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. 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 14%, to US$580m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Bandwidth had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$29m at the EBIT level. 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 burned through US$27m in negative free cash flow over the last year. That means it's on the risky side of things. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Bandwidth (2 are potentially serious!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.