Is Cogent Communications Holdings (NASDAQ:CCOI) Using Too Much 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. Importantly, Cogent Communications Holdings, Inc. (NASDAQ:CCOI) does carry debt. But the real question is whether this debt is making the company risky.

We've discovered 3 warning signs about Cogent Communications Holdings. View them for free.

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. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.

What Is Cogent Communications Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Cogent Communications Holdings had US$1.46b of debt, an increase on US$984.3m, over one year. However, it also had US$198.5m in cash, and so its net debt is US$1.26b.

A Look At Cogent Communications Holdings' Liabilities

We can see from the most recent balance sheet that Cogent Communications Holdings had liabilities of US$253.3m falling due within a year, and liabilities of US$2.70b due beyond that. On the other hand, it had cash of US$198.5m and US$180.1m worth of receivables due within a year. So its liabilities total US$2.57b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of US$2.68b, so it does suggest shareholders should keep an eye on Cogent Communications Holdings' use of debt. 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 Cogent Communications Holdings'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.

View our latest analysis for Cogent Communications Holdings

Over 12 months, Cogent Communications Holdings reported revenue of US$956m, which is a gain of 7.3%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Cogent Communications Holdings had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$180m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$204m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. We've identified 3 warning signs with Cogent Communications Holdings (at least 2 which don't sit too well with us) , and understanding them should be part of your investment process.

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.