Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Castlight Health, Inc. (NYSE:CSLT) does carry debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
What Is Castlight Health's Debt?
As you can see below, Castlight Health had US$4.18m of debt at June 2019, down from US$5.58m a year prior. However, it does have US$63.9m in cash offsetting this, leading to net cash of US$59.7m.
A Look At Castlight Health's Liabilities
According to the last reported balance sheet, Castlight Health had liabilities of US$54.3m due within 12 months, and liabilities of US$16.3m due beyond 12 months. On the other hand, it had cash of US$63.9m and US$32.6m worth of receivables due within a year. So it actually has US$26.0m more liquid assets than total liabilities.
This short term liquidity is a sign that Castlight Health could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Castlight Health has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Castlight Health'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 Castlight Health managed to grow its revenue by 5.2%, to US$154m. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is Castlight Health?
We have no doubt that loss making companies are, in general, riskier than profitable ones. 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$14m and booked a US$30m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$64m. That means it could keep spending at its current rate for more than four years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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 Castlight Health insider transactions.
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.
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