David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. We can see that Box, Inc. (NYSE:BOX) uses debt in its operations. But should shareholders worry about its use of debt?
When is debt a problem?
Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. The first thing to do when considering how much debt a business has is to look at its cash flow and debt together.
Check out our latest analysis for Box
What is Box’s net debt?
The image below, which you can click on for more details, shows that as of October 2021, Box had $367.0 million in debt, up from $51.3 million in one year. However, he has $708.3 million in cash to offset this, which translates to net cash of $341.3 million.
A look at Box’s responsibilities
We can see from the most recent balance sheet that Box had liabilities of US$587.8 million maturing in one year, and liabilities of US$597.3 million due beyond. In return, he had $708.3 million in cash and $154.6 million in receivables due within 12 months. It therefore has liabilities totaling $322.2 million more than its cash and short-term receivables, combined.
Of course, Box has a market cap of US$3.67 billion, so those liabilities are probably manageable. That said, it is clear that we must continue to monitor its record, lest it deteriorate. While he has liabilities to note, Box also has more cash than debt, so we’re pretty confident he can manage his debt safely. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Box 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.
Year-over-year, Box reported revenue of $840 million, a gain of 11%, although it reported no earnings before interest and taxes. We generally like to see faster growth from unprofitable companies, but each in its own way.
So how risky is Box?
Although Box posted a loss in earnings before interest and taxes (EBIT) in the last twelve months, it generated positive free cash flow of $233 million. So, although it is loss-making, it does not seem to have too much short-term balance sheet risk, given net cash. With uninspiring revenue growth, we would really need to see positive EBIT before we get a lot of excitement out of this business. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. These risks can be difficult to spot. Every business has them, and we’ve spotted 1 warning sign for Box you should know.
If you are interested in investing in businesses that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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