We Think Ping Identity Holding (NYSE:PING) Is Taking Some Risk With Its Debt
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Ping Identity Holding Corp. (NYSE:PING) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Ping Identity Holding
How Much Debt Does Ping Identity Holding Carry?
The image below, which you can click on for greater detail, shows that Ping Identity Holding had debt of US$75.6m at the end of September 2019, a reduction from US$244.0m over a year. But on the other hand it also has US$81.9m in cash, leading to a US$6.35m net cash position.
How Strong Is Ping Identity Holding's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Ping Identity Holding had liabilities of US$55.2m due within 12 months and liabilities of US$113.1m due beyond that. On the other hand, it had cash of US$81.9m and US$100.4m worth of receivables due within a year. So it actually has US$14.0m more liquid assets than total liabilities.
This state of affairs indicates that Ping Identity Holding'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$1.81b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Ping Identity Holding boasts net cash, so it's fair to say it does not have a heavy debt load!
Importantly, Ping Identity Holding's EBIT fell a jaw-dropping 49% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. 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 Ping Identity Holding'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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Ping Identity Holding has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent two years, Ping Identity Holding recorded free cash flow of 24% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
Summing up
While it is always sensible to investigate a company's debt, in this case Ping Identity Holding has US$6.35m in net cash and a decent-looking balance sheet. So while Ping Identity Holding does not have a great balance sheet, it's certainly not too bad. Even though Ping Identity Holding lost money on the bottom line, its positive EBIT suggests the business itself has potential. So you might want to check out how earnings have been trending over the last few years.
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.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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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