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. 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. Importantly, BlackBerry Limited (TSE:BB) does carry debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we think about a company's use of debt, we first look at cash and debt together.
What Is BlackBerry's Debt?
You can click the graphic below for the historical numbers, but it shows that BlackBerry had US$606.0m of debt in February 2020, down from US$665.0m, one year before. However, its balance sheet shows it holds US$909.0m in cash, so it actually has US$303.0m net cash.
How Strong Is BlackBerry's Balance Sheet?
We can see from the most recent balance sheet that BlackBerry had liabilities of US$1.12b falling due within a year, and liabilities of US$238.0m due beyond that. Offsetting this, it had US$909.0m in cash and US$235.0m in receivables that were due within 12 months. So it has liabilities totalling US$215.0m more than its cash and near-term receivables, combined.
Since publicly traded BlackBerry shares are worth a total of US$2.38b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, BlackBerry also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine BlackBerry'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.
Over 12 months, BlackBerry reported revenue of US$1.0b, which is a gain of 15%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is BlackBerry?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months BlackBerry lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$18m of cash and made a loss of US$152m. While this does make the company a bit risky, it's important to remember it has net cash of US$303.0m. That means it could keep spending at its current rate for more than two years. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. Consider risks, for instance. Every company has them, and we've spotted 3 warning signs for BlackBerry you should know about.
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.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned.
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