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. As with many other companies RingCentral, Inc. (NYSE:RNG) makes use of 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. If things get really bad, the lenders can take control of the business. 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 RingCentral
How Much Debt Does RingCentral Carry?
The chart below, which you can click on for greater detail, shows that RingCentral had US$1.38b in debt in September 2021; about the same as the year before. However, because it has a cash reserve of US$345.2m, its net debt is less, at about US$1.04b.
A Look At RingCentral’s Liabilities
The latest balance sheet data shows that RingCentral had liabilities of US$475.6m due within a year, and liabilities of US$1.44b falling due after that. On the other hand, it had cash of US$345.2m and US$216.1m worth of receivables due within a year. So it has liabilities totalling US$1.36b more than its cash and near-term receivables, combined.
Since publicly traded RingCentral shares are worth a very impressive total of US$18.0b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine RingCentral’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 RingCentral wasn’t profitable at an EBIT level, but managed to grow its revenue by 34%, to US$1.5b. Shareholders probably have their fingers crossed that it can grow its way to profits.
Caveat Emptor
Even though RingCentral managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at US$227m. 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. However, it doesn’t help that it burned through US$6.8m of cash over the last year. So suffice it to say we do consider the stock to be 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. Case in point: We’ve spotted 3 warning signs for RingCentral you should be aware of.
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.
Read More: Would RingCentral (NYSE:RNG) Be Better Off With Less Debt?