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. 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 HubSpot, Inc. (NYSE:HUBS) makes use of debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 HubSpot Carry?
The image below, which you can click on for greater detail, shows that at June 2019 HubSpot had debt of US$329.5m, up from US$308.4m in one year. However, its balance sheet shows it holds US$955.2m in cash, so it actually has US$625.7m net cash.
How Strong Is HubSpot's Balance Sheet?
The latest balance sheet data shows that HubSpot had liabilities of US$272.9m due within a year, and liabilities of US$572.4m falling due after that. Offsetting this, it had US$955.2m in cash and US$73.0m in receivables that were due within 12 months. So it can boast US$182.8m more liquid assets than total liabilities.
This surplus suggests that HubSpot has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, HubSpot 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 ultimately the future profitability of the business will decide if HubSpot 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.
Over 12 months, HubSpot reported revenue of US$591m, which is a gain of 34%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is HubSpot?
While HubSpot lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$62m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Keeping in mind its 34% revenue growth over the last year, we think there's a decent chance the company is on track. We'd see further strong growth as an optimistic indication. For riskier companies like HubSpot I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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