Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about. 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 note that Vocera Communications, Inc. (NYSE:VCRA) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Vocera Communications Carry?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Vocera Communications had US$113.8m of debt, an increase on US$108.3m, over one year. However, its balance sheet shows it holds US$215.4m in cash, so it actually has US$101.6m net cash.
How Strong Is Vocera Communications's Balance Sheet?
The latest balance sheet data shows that Vocera Communications had liabilities of US$58.6m due within a year, and liabilities of US$130.5m falling due after that. Offsetting this, it had US$215.4m in cash and US$38.7m in receivables that were due within 12 months. So it can boast US$64.9m more liquid assets than total liabilities.
This surplus suggests that Vocera Communications has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Vocera Communications 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 Vocera Communications's ability to maintain a healthy balance sheet going forward. 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, Vocera Communications reported revenue of US$177m, which is a gain of 2.4%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is Vocera Communications?
Although Vocera Communications had negative earnings before interest and tax (EBIT) over the last twelve months, it generated positive free cash flow of US$8.2m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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 Vocera Communications insider transactions.
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.
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