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.’ It’s only natural to consider a company’s balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Ping Identity Holding Corp. (NYSE:PING) does use debt in its business. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company can’t easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company’s debt levels is to consider its cash and debt together.
What Is Ping Identity Holding’s Debt?
As you can see below, Ping Identity Holding had US$119.1m of debt at June 2021, down from US$148.9m a year prior. However, it also had US$104.3m in cash, and so its net debt is US$14.8m.
How Healthy Is Ping Identity Holding’s Balance Sheet?
We can see from the most recent balance sheet that Ping Identity Holding had liabilities of US$78.4m falling due within a year, and liabilities of US$149.8m due beyond that. Offsetting this, it had US$104.3m in cash and US$127.7m in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.
Having regard to Ping Identity Holding’s size, it seems that its liquid assets are well balanced with its total liabilities. So it’s very unlikely that the US$2.06b company is short on cash, but still worth keeping an eye on the balance sheet. Carrying virtually no net debt, Ping Identity Holding has a very light debt load indeed. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Ping Identity Holding can strengthen its balance sheet over time.
Over 12 months, Ping Identity Holding reported revenue of US$271m, which is a gain of 8.2%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Caveat Emptor
Over the last twelve months Ping Identity Holding produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$48m. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we’d be more likely to spend time trying to understand the stock if the company made a profit. So it seems too risky for our taste. The balance sheet is clearly the area to focus on when you are analysing debt.