Would Cogent Communications Holdings (NASDAQ:CCOI) Be Better Off With Less 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.' 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. Importantly, Cogent Communications Holdings, Inc. (NASDAQ:CCOI) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Cogent Communications Holdings

What Is Cogent Communications Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Cogent Communications Holdings had debt of US$1.47b, up from US$996.4m in one year. However, it does have US$384.4m in cash offsetting this, leading to net debt of about US$1.09b.

A Look At Cogent Communications Holdings' Liabilities

We can see from the most recent balance sheet that Cogent Communications Holdings had liabilities of US$313.0m falling due within a year, and liabilities of US$2.62b due beyond that. On the other hand, it had cash of US$384.4m and US$195.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$2.35b.

This deficit isn't so bad because Cogent Communications Holdings is worth US$4.02b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Cogent Communications Holdings can strengthen its balance sheet over time. 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 Cogent Communications Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 49%, to US$999m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Cogent Communications Holdings still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$190m. 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$263m in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 6 warning signs for Cogent Communications Holdings (4 are a bit unpleasant) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.