Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, BlackLine, Inc. (NASDAQ:BL) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 March 2020 BlackLine had US$389.9m of debt, an increase on none, over one year. But it also has US$614.0m in cash to offset that, meaning it has US$224.1m net cash.
A Look At BlackLine's Liabilities
We can see from the most recent balance sheet that BlackLine had liabilities of US$199.6m falling due within a year, and liabilities of US$408.8m due beyond that. Offsetting these obligations, it had cash of US$614.0m as well as receivables valued at US$90.1m due within 12 months. So it can boast US$95.6m more liquid assets than total liabilities.
This state of affairs indicates that BlackLine's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$4.99b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that BlackLine has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if BlackLine 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 BlackLine wasn't profitable at an EBIT level, but managed to grow its revenue by 28%, to US$307m. 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$24m. 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. Keeping in mind its 28% revenue growth over the last year, we think there's a decent chance the company is on track. There's no doubt fast top line growth can cure all manner of ills, for a stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 5 warning signs with BlackLine (at least 1 which can't be ignored) , and understanding them should be part of your investment process.
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.
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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