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.’ So it seems the smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess how risky a company is. We can see that Bottomline Technologies, Inc. (NASDAQ:EPAY) does use debt in its business. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Bottomline Technologies Carry?
You can click the graphic below for the historical numbers, but it shows that Bottomline Technologies had US$133.1m of debt in June 2021, down from US$185.1m, one year before. However, its balance sheet shows it holds US$144.1m in cash, so it actually has US$11.0m net cash.
A Look At Bottomline Technologies’ Liabilities
We can see from the most recent balance sheet that Bottomline Technologies had liabilities of US$155.9m falling due within a year, and liabilities of US$203.6m due beyond that. Offsetting this, it had US$144.1m in cash and US$79.6m in receivables that were due within 12 months. So its liabilities total US$135.7m more than the combination of its cash and short-term receivables.
Given Bottomline Technologies has a market capitalization of US$1.89b, it’s hard to believe these liabilities pose much threat. Having said that, it’s clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Bottomline Technologies boasts net cash, so it’s fair to say it does not have a heavy debt load!
Unfortunately, Bottomline Technologies’s EBIT flopped 20% over the last four quarters. If that sort of decline is not arrested, then the managing its debt will be harder than selling broccoli flavoured ice-cream for a premium. There’s no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Bottomline Technologies’s ability to maintain a healthy balance sheet going forward. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Bottomline Technologies 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 actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
While it is always sensible to look at a company’s total liabilities, it is very reassuring that Bottomline Technologies has US$11.0m in net cash. And it impressed us with free cash flow of US$44m, being 1,180% of its EBIT. So we are not troubled with Bottomline Technologies’s debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet – far from it. We’ve identified 3 warning signs with Bottomline Technologies, and understanding them should be part of your investment process.
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