Warren Buffett famously said, '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. As with many other companies Coupa Software Incorporated (NASDAQ:COUP) makes use of debt. But is this debt a concern to shareholders?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Coupa Software's Debt?
As you can see below, at the end of July 2019, Coupa Software had US$724.8m of debt, up from US$168.7m a year ago. Click the image for more detail. But it also has US$808.2m in cash to offset that, meaning it has US$83.4m net cash.
A Look At Coupa Software's Liabilities
We can see from the most recent balance sheet that Coupa Software had liabilities of US$431.9m falling due within a year, and liabilities of US$591.1m due beyond that. On the other hand, it had cash of US$808.2m and US$83.9m worth of receivables due within a year. So it has liabilities totalling US$130.8m more than its cash and near-term receivables, combined.
Having regard to Coupa Software's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$8.60b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Coupa Software 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 Coupa Software 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.
Over 12 months, Coupa Software reported revenue of US$319m, which is a gain of 46%. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Coupa Software?
Although Coupa Software had negative earnings before interest and tax (EBIT) over the last twelve months, it generated positive free cash flow of US$23m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. One positive is that Coupa Software is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But that doesn't change our opinion that the stock is risky. For riskier companies like Coupa Software I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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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