Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Fastly, Inc. (NYSE:FSLY) does use debt in its business. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Fastly
How Much Debt Does Fastly Carry?
You can click the graphic below for the historical numbers, but it shows that Fastly had US$20.1m of debt in June 2020, down from US$44.1m, one year before. However, its balance sheet shows it holds US$384.0m in cash, so it actually has US$363.9m net cash.
How Healthy Is Fastly's Balance Sheet?
The latest balance sheet data shows that Fastly had liabilities of US$38.3m due within a year, and liabilities of US$27.4m falling due after that. Offsetting this, it had US$384.0m in cash and US$58.3m in receivables that were due within 12 months. So it can boast US$376.7m more liquid assets than total liabilities.
This short term liquidity is a sign that Fastly could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Fastly boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Fastly 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.
In the last year Fastly wasn't profitable at an EBIT level, but managed to grow its revenue by 45%, to US$246m. With any luck the company will be able to grow its way to profitability.
So How Risky Is Fastly?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Fastly had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$58.4m and booked a US$52.7m accounting loss. But at least it has US$363.9m on the balance sheet to spend on growth, near-term. Fastly's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for Fastly you should be aware of, and 1 of them doesn't sit too well with us.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.
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