Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Nutanix, Inc. (NASDAQ:NTNX) does carry 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 examine debt levels, we first consider both cash and debt levels, together.
What Is Nutanix's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of July 2019 Nutanix had US$458.9m of debt, an increase on US$429.6m, over one year. But on the other hand it also has US$908.8m in cash, leading to a US$449.9m net cash position.
How Healthy Is Nutanix's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Nutanix had liabilities of US$599.3m due within 12 months and liabilities of US$999.8m due beyond that. Offsetting this, it had US$908.8m in cash and US$245.5m in receivables that were due within 12 months. So it has liabilities totalling US$444.8m more than its cash and near-term receivables, combined.
Given Nutanix has a market capitalization of US$4.46b, it's hard to believe these liabilities pose much threat. 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, Nutanix 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 Nutanix'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, Nutanix reported revenue of US$1.2b, which is a gain of 7.0%. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is Nutanix?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Nutanix lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$76m and booked a US$621m accounting loss. But the saving grace is the US$909m on the balance sheet. That means it could keep spending at its current rate for more than five years. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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 Nutanix insider transactions.
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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