Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that ‘Volatility is far from synonymous with risk’. When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Box, Inc. (NYSE:BOX) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Box’s Debt?
The image below, which you can click on for greater detail, shows that at October 2019 Box had debt of US$40.0m, up from US$40.0 in one year. But on the other hand it also has US$200.9m in cash, leading to a US$160.9m net cash position.
A Look At Box’s Liabilities
Zooming in on the latest balance sheet data, we can see that Box had liabilities of US$467.5m due within 12 months and liabilities of US$355.6m due beyond that. Offsetting this, it had US$200.9m in cash and US$108.4m in receivables that were due within 12 months. So its liabilities total US$513.9m more than the combination of its cash and short-term receivables.
While this might seem like a lot, it is not so bad since Box has a market capitalization of US$2.43b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Box boasts net cash, so it’s fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Box’s ability to maintain a healthy balance sheet going forward.
In the last year Box wasn’t profitable at an EBIT level, but managed to grow its revenue by 16%, to US$676m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is Box?
Although Box had negative earnings before interest and tax (EBIT) over the last twelve months, it generated positive free cash flow of US$47m. So taking that on face value, and considering the net cash situation, we don’t think that the stock is too risky in the near term. Until we see some positive EBIT, we’re a bit cautious of the stock, not least because of the rather modest revenue growth. 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. Consider for instance, the ever-present spectre of investment risk. We’ve identified 2 warning signs with Box , and understanding them should be part of your investment process.