Yahoo Finance Is 8x8 (NYSE:EGHT) A Risky Investment?
The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies 8x8, Inc. (NYSE:EGHT) makes use of debt. But the more important question is: how much risk is that debt creating?
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, 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.
View our latest analysis for 8x8
How Much Debt Does 8x8 Carry?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 8x8 had US$219.2m of debt, an increase on , over one year. But it also has US$296.5m in cash to offset that, meaning it has US$77.3m net cash.
A Look At 8x8's Liabilities
We can see from the most recent balance sheet that 8x8 had liabilities of US$88.8m falling due within a year, and liabilities of US$239.5m due beyond that. Offsetting this, it had US$296.5m in cash and US$23.4m in receivables that were due within 12 months. So its liabilities total US$8.47m more than the combination of its cash and short-term receivables.
Having regard to 8x8's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$2.30b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, 8x8 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 it is future earnings, more than anything, that will determine 8x8's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, 8x8 reported revenue of US$366m, which is a gain of 18%, 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.
So How Risky Is 8x8?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that 8x8 had negative earnings before interest and tax (EBIT), over the last year. And over the same period it saw negative free cash outflow of US$74m and booked a US$108m accounting loss. But the saving grace is the US$77.3m on the balance sheet. That means it could keep spending at its current rate for more than two years. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting 8x8 insider transactions.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
