Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We can see that EverCommerce Inc. (NASDAQ:EVCM) does use debt in its business. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. 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.
See our latest analysis for EverCommerce
What Is EverCommerce's Debt?
The chart below, which you can click on for greater detail, shows that EverCommerce had US$533.3m in debt in September 2023; about the same as the year before. However, it also had US$87.3m in cash, and so its net debt is US$445.9m.
How Healthy Is EverCommerce's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that EverCommerce had liabilities of US$108.6m due within 12 months and liabilities of US$570.5m due beyond that. On the other hand, it had cash of US$87.3m and US$64.0m worth of receivables due within a year. So it has liabilities totalling US$527.9m more than its cash and near-term receivables, combined.
EverCommerce has a market capitalization of US$1.94b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if EverCommerce 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 EverCommerce wasn't profitable at an EBIT level, but managed to grow its revenue by 12%, to US$668m. We usually like to see faster growth from unprofitable companies, but each to their own.
Caveat Emptor
Importantly, EverCommerce had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$881k. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of US$40m. So we do think this stock is quite risky. 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. We've identified 1 warning sign with EverCommerce , and understanding them should be part of your investment process.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.