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.' 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. Importantly, Workiva Inc. (NYSE:WK) does carry debt. But the more important question is: how much risk is that debt creating?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.
What Is Workiva's Net Debt?
The image below, which you can click on for greater detail, shows that at June 2020 Workiva had debt of US$285.0m, up from none in one year. But on the other hand it also has US$508.6m in cash, leading to a US$223.6m net cash position.
A Look At Workiva's Liabilities
We can see from the most recent balance sheet that Workiva had liabilities of US$233.0m falling due within a year, and liabilities of US$350.5m due beyond that. Offsetting this, it had US$508.6m in cash and US$44.1m in receivables that were due within 12 months. So it has liabilities totalling US$30.8m more than its cash and near-term receivables, combined.
This state of affairs indicates that Workiva's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$2.61b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Workiva also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Workiva can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Workiva reported revenue of US$324m, which is a gain of 21%, 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 Workiva?
While Workiva lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$16m. 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. The good news for Workiva shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But that doesn't change our opinion that the stock is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Workiva that you should be aware of before investing here.
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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