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. As with many other companies Bottomline Technologies (de), Inc. (NASDAQ:EPAY) makes use of debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Bottomline Technologies (de)
How Much Debt Does Bottomline Technologies (de) Carry?
As you can see below, at the end of June 2020, Bottomline Technologies (de) had US$185.1m of debt, up from US$111.3m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$205.0m in cash, so it actually has US$20.0m net cash.
How Strong Is Bottomline Technologies (de)’s Balance Sheet?
The latest balance sheet data shows that Bottomline Technologies (de) had liabilities of US$150.0m due within a year, and liabilities of US$250.8m falling due after that. On the other hand, it had cash of US$205.0m and US$70.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$125.8m.
Since publicly traded Bottomline Technologies (de) shares are worth a total of US$1.91b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Bottomline Technologies (de) boasts net cash, so it’s fair to say it does not have a heavy debt load!
Shareholders should be aware that Bottomline Technologies (de)’s EBIT was down 42% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. There’s no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Bottomline Technologies (de) 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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Bottomline Technologies (de) has net cash on its balance sheet, it’s still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Bottomline Technologies (de) actually produced more free cash flow than EBIT over the last three years. There’s nothing better than incoming cash when it comes to staying in your lenders’ good graces.
Summing up
While it is always sensible to look at a company’s total liabilities, it is very reassuring that Bottomline Technologies (de) has US$20.0m in net cash. And it impressed us with free cash flow of US$51m, being 1,098% of its EBIT. So we are not troubled with Bottomline Technologies (de)’s debt use. 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 Bottomline Technologies (de) 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.
This article by Simply Wall St is general in nature. 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.
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