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 Boingo Wireless, Inc. (NASDAQ:WIFI) does use debt in its business. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
What Is Boingo Wireless's Debt?
The image below, which you can click on for greater detail, shows that at June 2020 Boingo Wireless had debt of US$268.6m, up from US$162.0m in one year. However, it also had US$172.0m in cash, and so its net debt is US$96.6m.
How Strong Is Boingo Wireless's Balance Sheet?
According to the last reported balance sheet, Boingo Wireless had liabilities of US$215.8m due within 12 months, and liabilities of US$391.5m due beyond 12 months. Offsetting this, it had US$172.0m in cash and US$22.2m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$413.0m.
This is a mountain of leverage relative to its market capitalization of US$434.0m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Boingo Wireless'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.
Over 12 months, Boingo Wireless made a loss at the EBIT level, and saw its revenue drop to US$247m, which is a fall of 7.7%. That's not what we would hope to see.
Importantly, Boingo Wireless had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$4.7m at the EBIT level. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of US$16m into a profit. So we do think this stock is quite 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. Case in point: We've spotted 2 warning signs for Boingo Wireless you should be aware of.
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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