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. 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. We note that New Relic, Inc. (NYSE:NEWR) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does New Relic Carry?
You can click the graphic below for the historical numbers, but it shows that as of September 2019 New Relic had US$416.3m of debt, an increase on US$395.8m, over one year. But it also has US$771.5m in cash to offset that, meaning it has US$355.1m net cash.
How Healthy Is New Relic's Balance Sheet?
We can see from the most recent balance sheet that New Relic had liabilities of US$297.3m falling due within a year, and liabilities of US$479.1m due beyond that. Offsetting this, it had US$771.5m in cash and US$77.0m in receivables that were due within 12 months. So it actually has US$72.0m more liquid assets than total liabilities.
This state of affairs indicates that New Relic's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$3.98b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, New Relic 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 it is future earnings, more than anything, that will determine New Relic'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, New Relic reported revenue of US$543m, which is a gain of 31%, 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 New Relic?
Although New Relic had negative earnings before interest and tax (EBIT) over the last twelve months, it generated positive free cash flow of US$37m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Keeping in mind its 31% revenue growth over the last year, we think there's a decent chance the company is on track. There's no doubt fast top line growth can cure all manner of ills, for a stock. 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 New Relic insider transactions.
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.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned.
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