The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Fastly, Inc. (NYSE:FSLY) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. 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 Fastly's Debt?
As you can see below, at the end of June 2019, Fastly had US$44.1m of debt, up from US$24.9m a year ago. Click the image for more detail. However, it does have US$245.6m in cash offsetting this, leading to net cash of US$201.5m.
How Healthy Is Fastly's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Fastly had liabilities of US$65.3m due within 12 months and liabilities of US$23.8m due beyond that. Offsetting these obligations, it had cash of US$245.6m as well as receivables valued at US$28.5m due within 12 months. So it can boast US$185.1m more liquid assets than total liabilities.
This surplus suggests that Fastly has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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 ultimately the future profitability of the business will decide if Fastly can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Fastly reported revenue of US$169m, which is a gain of 36%. With any luck the company will be able to grow its way to profitability.
So How Risky Is Fastly?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Fastly had negative earnings before interest and tax (EBIT), over the last year. Indeed, in that time it burnt through US$40m of cash and made a loss of US$41m. While this does make the company a bit risky, it's important to remember it has net cash of US$246m. That kitty means the company can keep spending for growth for at least five years, at current rates. 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. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Fastly's profit, revenue, and operating cashflow have changed over the last few years.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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