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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that BILL Holdings, Inc. (NYSE:BILL) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is BILL Holdings's Net Debt?
As you can see below, BILL Holdings had US$1.15b of debt at March 2024, down from US$1.84b a year prior. However, its balance sheet shows it holds US$1.79b in cash, so it actually has US$643.4m net cash.
How Healthy Is BILL Holdings' Balance Sheet?
The latest balance sheet data shows that BILL Holdings had liabilities of US$3.83b due within a year, and liabilities of US$1.24b falling due after that. On the other hand, it had cash of US$1.79b and US$679.5m worth of receivables due within a year. So it has liabilities totalling US$2.59b more than its cash and near-term receivables, combined.
This deficit isn't so bad because BILL Holdings is worth US$5.09b, and thus could probably raise enough capital to shore up 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. Despite its noteworthy liabilities, BILL Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! 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 BILL Holdings's ability to maintain a healthy balance sheet going forward. 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 BILL Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 29%, to US$1.2b. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is BILL Holdings?
While BILL Holdings lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$258m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. The good news for BILL Holdings shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But we still think it's somewhat risky. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting BILL Holdings insider transactions.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.
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