Is Bandwidth (NASDAQ:BAND) Using Too Much Debt?

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.' 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. Importantly, Bandwidth Inc. (NASDAQ:BAND) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. The first thing to do when considering how much debt a business uses is to look at 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$417.6m of debt in June 2023, down from US$636.5m, one year before. However, it does have US$122.6m in cash offsetting this, leading to net debt of about US$295.0m.

How Strong Is Bandwidth's Balance Sheet?

The latest balance sheet data shows that Bandwidth had liabilities of US$97.8m due within a year, and liabilities of US$527.5m falling due after that. Offsetting these obligations, it had cash of US$122.6m as well as receivables valued at US$74.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$427.9m.

Given this deficit is actually higher than the company's market capitalization of US$307.7m, we think shareholders really should watch Bandwidth's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. 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 12%, to US$589m. 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. Indeed, it lost US$27m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of US$17m over the last twelve months. That means it's on the risky side of things. 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. Be aware that Bandwidth is showing 3 warning signs in our investment analysis , and 2 of those shouldn't be ignored...

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.