David Iben put it well when he said, ‘Volatility is not a risk we care about. What we care about is avoiding the 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 note that Shift4 Payments, Inc. (NYSE:FOUR) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Shift4 Payments’s Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2021 Shift4 Payments had US$1.12b of debt, an increase on US$708.6m, over one year. However, it does have US$844.9m in cash offsetting this, leading to net debt of about US$271.5m.
How Healthy Is Shift4 Payments’ Balance Sheet?
We can see from the most recent balance sheet that Shift4 Payments had liabilities of US$139.0m falling due within a year, and liabilities of US$1.12b due beyond that. Offsetting this, it had US$844.9m in cash and US$129.4m in receivables that were due within 12 months. So its liabilities total US$285.2m more than the combination of its cash and short-term receivables.
Since publicly traded Shift4 Payments shares are worth a total of US$7.90b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Shift4 Payments’s ability to maintain a healthy balance sheet going forward.
In the last year Shift4 Payments wasn’t profitable at an EBIT level, but managed to grow its revenue by 4.0%, to US$807m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Over the last twelve months Shift4 Payments produced an earnings before interest and tax (EBIT) loss. Indeed, it lost US$110m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn’t help that it burned through US$52m of cash over the last year. So to be blunt we think it is risky. 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.