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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We note that Twilio Inc. (NYSE:TWLO) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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 step when considering a company's debt levels is to consider its cash and debt together.
What Is Twilio's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2021 Twilio had US$985.2m of debt, an increase on US$470.5m, over one year. But on the other hand it also has US$5.93b in cash, leading to a US$4.94b net cash position.
How Strong Is Twilio's Balance Sheet?
According to the last reported balance sheet, Twilio had liabilities of US$583.3m due within 12 months, and liabilities of US$1.26b due beyond 12 months. Offsetting these obligations, it had cash of US$5.93b as well as receivables valued at US$301.5m due within 12 months. So it actually has US$4.39b more liquid assets than total liabilities.
This short term liquidity is a sign that Twilio could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Twilio 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 Twilio 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.
In the last year Twilio wasn't profitable at an EBIT level, but managed to grow its revenue by 62%, to US$2.3b. With any luck the company will be able to grow its way to profitability.
So How Risky Is Twilio?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Twilio had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$18m and booked a US$731m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$4.94b. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, Twilio may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 5 warning signs we've spotted with Twilio (including 1 which can't be ignored) .
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.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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