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 BlackLine, Inc. (NASDAQ:BL) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is BlackLine's Debt?
As you can see below, BlackLine had US$1.39b of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has US$1.20b in cash leading to net debt of about US$185.4m.
How Strong Is BlackLine's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that BlackLine had liabilities of US$642.6m due within 12 months and liabilities of US$1.17b due beyond that. Offsetting this, it had US$1.20b in cash and US$171.6m in receivables that were due within 12 months. So its liabilities total US$433.7m more than the combination of its cash and short-term receivables.
Given BlackLine has a market capitalization of US$3.64b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine BlackLine's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year BlackLine wasn't profitable at an EBIT level, but managed to grow its revenue by 13%, to US$590m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Caveat Emptor
Importantly, BlackLine had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$7.8m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Surprisingly, we note that it actually reported positive free cash flow of US$99m and a profit of US$53m. So one might argue that there's still a chance it can get things on the right track. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for BlackLine (of which 1 is potentially serious!) you should know about.
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.