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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Forescout Technologies, Inc. (NASDAQ:FSCT) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Forescout Technologies Carry?
As you can see below, Forescout Technologies had US$11.9m of debt at June 2019, down from US$19.2m a year prior. But on the other hand it also has US$104.9m in cash, leading to a US$93.0m net cash position.
How Healthy Is Forescout Technologies's Balance Sheet?
According to the last reported balance sheet, Forescout Technologies had liabilities of US$171.4m due within 12 months, and liabilities of US$105.8m due beyond 12 months. On the other hand, it had cash of US$104.9m and US$66.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$105.3m.
Of course, Forescout Technologies has a market capitalization of US$1.68b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Forescout Technologies also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 Forescout Technologies'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.
Over 12 months, Forescout Technologies reported revenue of US$324m, which is a gain of 25%. With any luck the company will be able to grow its way to profitability.
So How Risky Is Forescout Technologies?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Forescout Technologies had negative earnings before interest and tax (EBIT), truth be told. And over the same period it saw negative free cash outflow of US$30m and booked a US$91m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$105m. That means it could keep spending at its current rate for more than two years. Forescout Technologies's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. For riskier companies like Forescout Technologies I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
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.
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