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 Twilio Inc. (NYSE:TWLO) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Twilio Carry?
The image below, which you can click on for greater detail, shows that Twilio had debt of US$432.7m at the end of September 2020, a reduction from US$452.2m over a year. But on the other hand it also has US$3.30b in cash, leading to a US$2.87b net cash position.
How Strong Is Twilio's Balance Sheet?
The latest balance sheet data shows that Twilio had liabilities of US$326.3m due within a year, and liabilities of US$635.1m falling due after that. Offsetting this, it had US$3.30b in cash and US$203.8m in receivables that were due within 12 months. So it actually has US$2.54b 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! 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 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.
Over 12 months, Twilio reported revenue of US$1.5b, which is a gain of 53%, 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 Twilio?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Twilio had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$47m of cash and made a loss of US$402m. While this does make the company a bit risky, it's important to remember it has net cash of US$2.87b. 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Twilio you should be aware of.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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. 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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