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. 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. We note that Phreesia, Inc. (NYSE:PHR) does have debt on its balance sheet. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
What Is Phreesia's Net Debt?
As you can see below, Phreesia had US$19.2m of debt at July 2019, down from US$22.9m a year prior. But on the other hand it also has US$100.1m in cash, leading to a US$80.8m net cash position.
How Strong Is Phreesia's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Phreesia had liabilities of US$38.6m due within 12 months and liabilities of US$21.5m due beyond that. Offsetting these obligations, it had cash of US$100.1m as well as receivables valued at US$16.8m due within 12 months. So it actually has US$56.7m more liquid assets than total liabilities.
This short term liquidity is a sign that Phreesia could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Phreesia 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 Phreesia can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Phreesia reported revenue of US$110m, which is a gain of 23%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is Phreesia?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Phreesia had negative earnings before interest and tax (EBIT), over the last year. Indeed, in that time it burnt through US$11m of cash and made a loss of US$113m. But the saving grace is the US$80.8m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Phreesia'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 Phreesia 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.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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