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. As with many other companies Fastly, Inc. (NYSE:FSLY) makes use of debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Fastly's Debt?
You can click the graphic below for the historical numbers, but it shows that Fastly had US$20.1m of debt in June 2020, down from US$44.1m, one year before. However, its balance sheet shows it holds US$384.0m in cash, so it actually has US$363.9m net cash.
How Strong Is Fastly's Balance Sheet?
The latest balance sheet data shows that Fastly had liabilities of US$38.3m due within a year, and liabilities of US$27.4m falling due after that. Offsetting these obligations, it had cash of US$384.0m as well as receivables valued at US$58.3m due within 12 months. So it actually has US$376.7m more liquid assets than total liabilities.
This short term liquidity is a sign that Fastly could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Fastly 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 it is future earnings, more than anything, that will determine Fastly'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 Fastly wasn't profitable at an EBIT level, but managed to grow its revenue by 45%, to US$246m. With any luck the company will be able to grow its way to profitability.
So How Risky Is Fastly?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Fastly had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$58.4m of cash and made a loss of US$52.7m. But at least it has US$363.9m on the balance sheet to spend on growth, near-term. Fastly's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Like risks, for instance. Every company has them, and we've spotted 4 warning signs for Fastly (of which 1 is potentially serious!) 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.
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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