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 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. We note that Mimecast Limited (NASDAQ:MIME) does have debt on its balance sheet. 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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Mimecast's Net Debt?
As you can see below, at the end of June 2019, Mimecast had US$96.4m of debt, up from US$72.9m a year ago. Click the image for more detail. But it also has US$196.8m in cash to offset that, meaning it has US$100.5m net cash.
How Strong Is Mimecast's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Mimecast had liabilities of US$241.1m due within 12 months and liabilities of US$230.7m due beyond that. On the other hand, it had cash of US$196.8m and US$68.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$206.5m.
Since publicly traded Mimecast shares are worth a total of US$2.38b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Mimecast 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 Mimecast's ability to maintain a healthy balance sheet going forward. 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, Mimecast reported revenue of US$361m, which is a gain of 28%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Mimecast?
Although Mimecast had negative earnings before interest and tax (EBIT) over the last twelve months, it generated positive free cash flow of US$48m. 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. The good news for Mimecast shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But that doesn't change our opinion that the stock is risky. 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 Mimecast insider transactions.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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