David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Bill.com Holdings, Inc. (NYSE:BILL) makes use of 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Bill.com Holdings's Debt?
As you can see below, at the end of June 2020, Bill.com Holdings had US$2.30m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has US$697.6m in cash, leading to a US$695.3m net cash position.
How Healthy Is Bill.com Holdings's Balance Sheet?
According to the last reported balance sheet, Bill.com Holdings had liabilities of US$1.68b due within 12 months, and liabilities of US$16.4m due beyond 12 months. Offsetting these obligations, it had cash of US$697.6m as well as receivables valued at US$10.8m due within 12 months. So its liabilities total US$984.9m more than the combination of its cash and short-term receivables.
Since publicly traded Bill.com Holdings shares are worth a total of US$7.23b, it seems unlikely that this level of liabilities would be a major threat. 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 ultimately the future profitability of the business will decide if Bill.com Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Bill.com Holdings reported revenue of US$158m, which is a gain of 45%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Bill.com Holdings?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Bill.com Holdings lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$16.5m of cash and made a loss of US$31.1m. But the saving grace is the US$695.3m on the balance sheet. That means it could keep spending at its current rate for more than two years. Bill.com Holdings's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. 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. Case in point: We've spotted 3 warning signs for Bill.com Holdings you should be aware of, and 1 of them can't be ignored.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
This article by Simply Wall St is general in nature. 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.
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