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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Square, Inc. (NYSE:SQ) does use debt in its business. 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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Square's Debt?
The image below, which you can click on for greater detail, shows that Square had debt of US$919.0m at the end of June 2019, a reduction from US$1.07b over a year. However, its balance sheet shows it holds US$1.19b in cash, so it actually has US$270.5m net cash.
How Healthy Is Square's Balance Sheet?
According to the last reported balance sheet, Square had liabilities of US$2.38b due within 12 months, and liabilities of US$1.09b due beyond 12 months. On the other hand, it had cash of US$1.19b and US$1.60b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$680.6m.
Of course, Square has a titanic market capitalization of US$26.4b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Square 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 ultimately the future profitability of the business will decide if Square 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, Square reported revenue of US$3.9b, which is a gain of 47%. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Square?
While Square lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$322m. 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. One positive is that Square is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But we still think it's somewhat risky. For riskier companies like Square 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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