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 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, Proofpoint, Inc. (NASDAQ:PFPT) does carry debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
What Is Proofpoint's Debt?
The image below, which you can click on for greater detail, shows that at September 2020 Proofpoint had debt of US$774.9m, up from US$741.4m in one year. However, it does have US$1.02b in cash offsetting this, leading to net cash of US$244.6m.
A Look At Proofpoint's Liabilities
Zooming in on the latest balance sheet data, we can see that Proofpoint had liabilities of US$782.8m due within 12 months and liabilities of US$1.04b due beyond that. On the other hand, it had cash of US$1.02b and US$180.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$620.4m.
Of course, Proofpoint has a market capitalization of US$5.80b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Proofpoint boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Proofpoint 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 Proofpoint wasn't profitable at an EBIT level, but managed to grow its revenue by 21%, to US$1.0b. With any luck the company will be able to grow its way to profitability.
So How Risky Is Proofpoint?
While Proofpoint lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$228m. 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 Proofpoint shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But we still think it's somewhat risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Proofpoint , and understanding them should be part of your investment process.
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.
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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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