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.' 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. As with many other companies Bandwidth Inc. (NASDAQ:BAND) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.
How Much Debt Does Bandwidth Carry?
You can click the graphic below for the historical numbers, but it shows that Bandwidth had US$320.7m of debt in June 2024, down from US$417.6m, one year before. However, because it has a cash reserve of US$76.4m, its net debt is less, at about US$244.2m.
How Healthy Is Bandwidth's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Bandwidth had liabilities of US$156.5m due within 12 months and liabilities of US$538.2m due beyond that. Offsetting these obligations, it had cash of US$76.4m as well as receivables valued at US$85.6m due within 12 months. So its liabilities total US$532.6m more than the combination of its cash and short-term receivables.
When you consider that this deficiency exceeds the company's US$489.5m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Bandwidth 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 Bandwidth wasn't profitable at an EBIT level, but managed to grow its revenue by 12%, to US$662m. We usually like to see faster growth from unprofitable companies, but each to their own.
Caveat Emptor
Importantly, Bandwidth had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$32m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of US$21m. In the meantime, we consider the stock to be 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. For instance, we've identified 3 warning signs for Bandwidth that 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.
