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 can see that Blackbaud, Inc. (NASDAQ:BLKB) does use debt in its business. But should shareholders be worried about its use of debt?
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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company’s debt levels is to consider its cash and debt together.
How Much Debt Does Blackbaud Carry?
You can click the graphic below for the historical numbers, but it shows that as of September 2022 Blackbaud had US$854.1m of debt, an increase on US$527.4m, over one year. However, it also had US$31.4m in cash, and so its net debt is US$822.7m.
How Strong Is Blackbaud’s Balance Sheet?
We can see from the most recent balance sheet that Blackbaud had liabilities of US$871.0m falling due within a year, and liabilities of US$1.02b due beyond that. On the other hand, it had cash of US$31.4m and US$86.7m worth of receivables due within a year. So its liabilities total US$1.78b more than the combination of its cash and short-term receivables.
While this might seem like a lot, it is not so bad since Blackbaud has a market capitalization of US$3.03b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Blackbaud’s ability to maintain a healthy balance sheet going forward.
Over 12 months, Blackbaud reported revenue of US$1.0b, which is a gain of 12%, 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
Importantly, Blackbaud had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$12m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of US$31m into a profit. In the meantime, we consider the stock very risky.