David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 can see that Five9, Inc. (NASDAQ:FIVN) does use debt in its business. But should shareholders be worried about its use of debt?
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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Five9's Net Debt?
The chart below, which you can click on for greater detail, shows that Five9 had US$741.2m in debt in September 2023; about the same as the year before. However, because it has a cash reserve of US$700.3m, its net debt is less, at about US$40.9m.
NasdaqGM:FIVN Debt to Equity History February 5th 2024
How Strong Is Five9's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Five9 had liabilities of US$172.0m due within 12 months and liabilities of US$790.6m due beyond that. Offsetting this, it had US$700.3m in cash and US$97.3m in receivables that were due within 12 months. So it has liabilities totalling US$165.0m more than its cash and near-term receivables, combined.
Of course, Five9 has a market capitalization of US$5.33b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. But either way, Five9 has virtually no net debt, 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 Five9 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, Five9 reported revenue of US$880m, which is a gain of 18%, 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.
Caveat Emptor
Over the last twelve months Five9 produced an earnings before interest and tax (EBIT) loss. Indeed, it lost US$81m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of US$83m. So to be blunt we do think it is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Five9 has 2 warning signs we think you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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