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.’ When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Workiva Inc. (NYSE:WK) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company’s use of debt, we first look at cash and debt together.
What Is Workiva’s Debt?
As you can see below, Workiva had US$340.6m of debt, at March 2023, which is about the same as the year before. You can click the chart for greater detail. But it also has US$439.8m in cash to offset that, meaning it has US$99.2m net cash.
A Look At Workiva’s Liabilities
Zooming in on the latest balance sheet data, we can see that Workiva had liabilities of US$396.0m due within 12 months and liabilities of US$403.1m due beyond that. Offsetting this, it had US$439.8m in cash and US$82.2m in receivables that were due within 12 months. So its liabilities total US$277.1m more than the combination of its cash and short-term receivables.
Since publicly traded Workiva shares are worth a total of US$5.45b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Workiva boasts net cash, so it’s fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Workiva’s ability to maintain a healthy balance sheet going forward.
In the last year Workiva wasn’t profitable at an EBIT level, but managed to grow its revenue by 19%, to US$558m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is Workiva?
Although Workiva had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$15m. 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. With revenue growth uninspiring, we’d really need to see some positive EBIT before mustering much enthusiasm for this business.