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 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 Twilio Inc. (NYSE:TWLO) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Twilio’s Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2021 Twilio had US$985.2m of debt, an increase on US$470.5m, over one year. But it also has US$5.93b in cash to offset that, meaning it has US$4.94b net cash.
How Strong Is Twilio’s Balance Sheet?
The latest balance sheet data shows that Twilio had liabilities of US$583.3m due within a year, and liabilities of US$1.26b falling due after that. On the other hand, it had cash of US$5.93b and US$301.5m worth of receivables due within a year. So it can boast US$4.39b more liquid assets than total liabilities.
This short term liquidity is a sign that Twilio could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Twilio boasts net cash, so it’s fair to say it does not have a heavy debt load! There’s no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Twilio can strengthen its balance sheet over time.
In the last year Twilio wasn’t profitable at an EBIT level, but managed to grow its revenue by 62%, to US$2.3b. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Twilio?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Twilio lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$18m of cash and made a loss of US$731m. But the saving grace is the US$4.94b on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Twilio’s revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. There’s no doubt that we learn most about debt from the balance sheet.