Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, Castlight Health, Inc. (NYSE:CSLT) 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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Castlight Health's Debt?
The chart below, which you can click on for greater detail, shows that Castlight Health had US$3.25m in debt in December 2019; about the same as the year before. But it also has US$59.4m in cash to offset that, meaning it has US$56.2m net cash.
How Strong Is Castlight Health's Balance Sheet?
The latest balance sheet data shows that Castlight Health had liabilities of US$54.9m due within a year, and liabilities of US$15.0m falling due after that. Offsetting this, it had US$59.4m in cash and US$31.4m in receivables that were due within 12 months. So it actually has US$20.9m more liquid assets than total liabilities.
This excess liquidity suggests that Castlight Health is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Castlight Health boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Castlight Health 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 Castlight Health had negative earnings before interest and tax, and actually shrunk its revenue by 8.4%, to US$143m. That's not what we would hope to see.
So How Risky Is Castlight Health?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Castlight Health had negative earnings before interest and tax (EBIT), over the last year. And over the same period it saw negative free cash outflow of US$19m and booked a US$40m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$56.2m. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Castlight Health that you should be aware of before investing here.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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