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Legendary fund manager Li Lu (who Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital. It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Above all, BlackLine, Inc. (NASDAQ: BL) is in debt. But does this debt worry shareholders?
What risk does debt entail?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. By replacing dilution, however, debt can be a very good tool for companies 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 flow and debt together.
See our latest review for BlackLine
How much debt does BlackLine have?
The image below, which you can click for more details, shows that as of June 2021, BlackLine was in debt of $ 1.08 billion, up from $ 395.5 million in a year. However, his balance sheet shows that he holds $ 1.17 billion in cash, so he actually has $ 86.3 million in net cash.
A look at BlackLine’s responsibilities
We can see from the most recent balance sheet that BlackLine had liabilities of US $ 259.8 million due within one year and liabilities of US $ 1.12 billion due beyond. In return, he had $ 1.17 billion in cash and $ 100.9 million in receivables due within 12 months. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by $ 107.9 million.
Considering the size of BlackLine, it appears that its liquid assets are well balanced with its total liabilities. So the $ 7.33 billion company is highly unlikely to run out of cash, but it’s still worth keeping an eye on the balance sheet. Despite its notable liabilities, BlackLine has a net cash flow, so it’s fair to say that it doesn’t have a heavy debt load! When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether BlackLine can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Over the past year, BlackLine has not been profitable in terms of EBIT, but has managed to increase its revenue by 20%, to US $ 387 million. The shareholders are probably keeping their fingers crossed that this could generate a profit.
So how risky is BlackLine?
Although BlackLine recorded a loss of earnings before interest and taxes (EBIT) over the past twelve months, it generated positive free cash flow of US $ 58 million. So, although it is in deficit, it does not appear to have too much short-term balance sheet risk, given the net cash position. The good news for BlackLine shareholders is that its revenue growth is strong, making it easier to raise capital when needed. But that doesn’t change our opinion that the title is risky. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. To do this, you need to know the 3 warning signs we spotted with BlackLine.
At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.
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