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 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 HubSpot, Inc. (NYSE:HUBS) does use debt in its business. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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 step when considering a company’s debt levels is to consider its cash and debt together.
What Is HubSpot’s Net Debt?
The image below, which you can click on for greater detail, shows that at December 2020 HubSpot had debt of US$478.9m, up from US$340.6m in one year. However, it does have US$1.25b in cash offsetting this, leading to net cash of US$772.3m.
How Healthy Is HubSpot’s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that HubSpot had liabilities of US$445.5m due within 12 months and liabilities of US$765.2m due beyond that. On the other hand, it had cash of US$1.25b and US$126.4m worth of receivables due within a year. So it actually has US$166.9m more liquid assets than total liabilities.
Having regard to HubSpot’s size, it seems that its liquid assets are well balanced with its total liabilities. So while it’s hard to imagine that the US$23.1b company is struggling for cash, we still think it’s worth monitoring its balance sheet. Simply put, the fact that HubSpot has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine HubSpot’s ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, HubSpot reported revenue of US$883m, which is a gain of 31%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is HubSpot?
While HubSpot lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$30m. So although it is loss-making, it doesn’t seem to have too much near-term balance sheet risk, keeping in mind the net cash. We think its revenue growth of 31% is a good sign. We’d see further strong growth as an optimistic indication. 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.