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Limelight Networks (NASDAQ:LLNW) Has Debt But No Earnings; Should You Worry?

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.' 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 Limelight Networks, Inc. (NASDAQ:LLNW) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Limelight Networks

What Is Limelight Networks's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Limelight Networks had debt of US$99.9m, up from none in one year. But on the other hand it also has US$124.8m in cash, leading to a US$24.9m net cash position.

debt-equity-history-analysis
debt-equity-history-analysis

How Strong Is Limelight Networks's Balance Sheet?

We can see from the most recent balance sheet that Limelight Networks had liabilities of US$33.6m falling due within a year, and liabilities of US$112.7m due beyond that. Offsetting these obligations, it had cash of US$124.8m as well as receivables valued at US$46.2m due within 12 months. So it can boast US$24.6m more liquid assets than total liabilities.

This surplus suggests that Limelight Networks has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Limelight Networks 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 Limelight Networks's ability to maintain a healthy balance sheet going forward. 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, Limelight Networks reported revenue of US$235m, which is a gain of 27%, 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 Limelight Networks?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Limelight Networks lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$4.5m of cash and made a loss of US$8.5m. However, it has net cash of US$24.9m, so it has a bit of time before it will need more capital. With very solid revenue growth in the last year, Limelight Networks may be on a path to profitability. 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. To that end, you should be aware of the 2 warning signs we've spotted with Limelight Networks .

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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.

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