Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Above all, 8×8, Inc. (NYSE: EGHT) is in debt. But the real question is whether this debt makes the business risky.
Why is debt risky?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, many companies use debt to finance their growth, without any negative consequences. The first step when considering a company’s debt levels is to consider its cash and debt together.
See our latest analysis for 8×8
How much debt does the 8×8 support?
You can click on the chart below for historical numbers, but it shows that as of December 2021, 8×8 had $441.0 million in debt, up from $304.1 million, on a year. However, since he has a cash reserve of $244.9 million, his net debt is less, at around $196.1 million.
How healthy is 8×8’s balance sheet?
According to the last published balance sheet, 8×8 had liabilities of US$121.5 million due within 12 months and liabilities of US$517.2 million due beyond 12 months. In return, he had $244.9 million in cash and $59.4 million in receivables due within 12 months. Thus, its liabilities total $334.4 million more than the combination of its cash and short-term receivables.
8×8 has a market capitalization of US$1.30 billion, so it could very likely raise funds to improve its balance sheet, should the need arise. But we definitely want to keep our eyes peeled for indications that its debt is too risky. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future earnings, more than anything, that will determine 8×8’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
Last year, 8×8 was not profitable in terms of EBIT, but managed to increase its revenue by 18%, to $601 million. This rate of growth is a little slow for our liking, but it takes all types to make a world.
Caveat Emptor
Over the last twelve months, 8×8 has recorded a loss of earnings before interest and taxes (EBIT). Its EBIT loss was US$148 million. When we look at this and recall the liabilities on its balance sheet, versus cash, it seems unwise to us that the company has liabilities. Quite frankly, we think the track record falls short, although it could improve over time. However, it doesn’t help that he’s burned through $7.0 million in cash in the past year. So, to be frank, we think it’s risky. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. We have identified 5 warning signs with 8×8 (at least 1 which is potentially serious) and understanding them should be part of your investment process.
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.
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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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