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. As with many other companies BlackLine, Inc. (NASDAQ:BL) makes use of debt. But should shareholders be worried about its use of debt?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does BlackLine Carry?
You can click the graphic below for the historical numbers, but it shows that as of September 2019 BlackLine had US$378.9m of debt, an increase on none, over one year. However, its balance sheet shows it holds US$596.5m in cash, so it actually has US$217.7m net cash.
A Look At BlackLine's Liabilities
According to the last reported balance sheet, BlackLine had liabilities of US$178.2m due within 12 months, and liabilities of US$396.6m due beyond 12 months. Offsetting this, it had US$596.5m in cash and US$81.9m in receivables that were due within 12 months. So it actually has US$103.6m more liquid assets than total liabilities.
This surplus suggests that BlackLine has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, BlackLine boasts net cash, 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 it is future earnings, more than anything, that will determine BlackLine'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.
In the last year BlackLine wasn't profitable at an EBIT level, but managed to grow its revenue by25%, to US$271m. With any luck the company will be able to grow its way to profitability.
So How Risky Is BlackLine?
Although BlackLine had negative earnings before interest and tax (EBIT) over the last twelve months, it generated positive free cash flow of US$16m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We think its revenue growth of 25% is a good sign. There's no doubt fast top line growth can cure all manner of ills, for a stock. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting BlackLine insider transactions.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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