U.S. Markets open in 6 hrs 9 mins

Is Bill.com Holdings (NYSE:BILL) Using Too Much Debt?

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 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. We note that Bill.com Holdings, Inc. (NYSE:BILL) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Bill.com Holdings

What Is Bill.com Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2021 Bill.com Holdings had debt of US$1.77b, up from US$2.30m in one year. However, it does have US$2.84b in cash offsetting this, leading to net cash of US$1.07b.

debt-equity-history-analysis
debt-equity-history-analysis

How Healthy Is Bill.com Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Bill.com Holdings had liabilities of US$3.70b due within 12 months and liabilities of US$757.7m due beyond that. On the other hand, it had cash of US$2.84b and US$203.5m worth of receivables due within a year. So it has liabilities totalling US$1.41b more than its cash and near-term receivables, combined.

Of course, Bill.com Holdings has a titanic market capitalization of US$17.5b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Bill.com Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Bill.com Holdings's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Bill.com Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 83%, to US$308m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Bill.com Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Bill.com Holdings had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$33m and booked a US$161m accounting loss. But the saving grace is the US$1.07b on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, Bill.com Holdings may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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. For example, we've discovered 5 warning signs for Bill.com Holdings (1 can't be ignored!) that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.