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 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. Importantly, Cogent Communications Holdings, Inc. (NASDAQ:CCOI) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Cogent Communications Holdings's Net Debt?
As you can see below, at the end of September 2024, Cogent Communications Holdings had US$1.47b of debt, up from US$1.00b a year ago. Click the image for more detail. However, it does have US$279.2m in cash offsetting this, leading to net debt of about US$1.19b.
A Look At Cogent Communications Holdings' Liabilities
The latest balance sheet data shows that Cogent Communications Holdings had liabilities of US$280.6m due within a year, and liabilities of US$2.60b falling due after that. On the other hand, it had cash of US$279.2m and US$181.1m worth of receivables due within a year. So it has liabilities totalling US$2.42b more than its cash and near-term receivables, combined.
This deficit is considerable relative to its market capitalization of US$3.79b, so it does suggest shareholders should keep an eye on Cogent Communications Holdings' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 Cogent Communications Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Cogent Communications Holdings reported revenue of US$976m, which is a gain of 24%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
Caveat Emptor
While we can certainly appreciate Cogent Communications Holdings's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost US$198m at the EBIT level. 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$264m of cash over the last year. So in short it's a really risky stock. 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. To that end, you should learn about the 6 warning signs we've spotted with Cogent Communications Holdings (including 4 which shouldn't be ignored) .
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.
