Does Fastly (NYSE:FSLY) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Fastly, Inc. (NYSE:FSLY) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Fastly

How Much Debt Does Fastly Carry?

As you can see below, Fastly had US$343.5m of debt at December 2023, down from US$704.7m a year prior. However, it does have US$322.7m in cash offsetting this, leading to net debt of about US$20.8m.

How Strong Is Fastly's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Fastly had liabilities of US$147.7m due within 12 months and liabilities of US$398.0m due beyond that. Offsetting these obligations, it had cash of US$322.7m as well as receivables valued at US$120.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$102.5m.

Given Fastly has a market capitalization of US$1.83b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. But either way, Fastly has virtually no net debt, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Fastly 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 Fastly wasn't profitable at an EBIT level, but managed to grow its revenue by 17%, to US$506m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Fastly had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable US$190m 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$32m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. 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. Case in point: We've spotted 4 warning signs for Fastly 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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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.