David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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, FireEye, Inc. (NASDAQ:FEYE) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
What Is FireEye's Debt?
The image below, which you can click on for greater detail, shows that at June 2019 FireEye had debt of US$986.3m, up from US$939.4m in one year. However, its balance sheet shows it holds US$987.7m in cash, so it actually has US$1.47m net cash.
How Healthy Is FireEye's Balance Sheet?
According to the last reported balance sheet, FireEye had liabilities of US$784.0m due within 12 months, and liabilities of US$1.32b due beyond 12 months. On the other hand, it had cash of US$987.7m and US$127.5m worth of receivables due within a year. So its liabilities total US$987.2m more than the combination of its cash and short-term receivables.
While this might seem like a lot, it is not so bad since FireEye has a market capitalization of US$2.95b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, FireEye boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine FireEye'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 FireEye managed to grow its revenue by 6.5%, to US$857m. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is FireEye?
Although FireEye had negative earnings before interest and tax (EBIT) over the last twelve months, it generated positive free cash flow of US$9.6m. 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. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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 FireEye 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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