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Does Rapid7 (NASDAQ:RPD) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Rapid7, Inc. (NASDAQ:RPD) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

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Check out our latest analysis for Rapid7

How Much Debt Does Rapid7 Carry?

The image below, which you can click on for greater detail, shows that at March 2019 Rapid7 had debt of US$177.2m, up from none in one year. However, its balance sheet shows it holds US$251.5m in cash, so it actually has US$74.3m net cash.

NasdaqGM:RPD Historical Debt, July 31st 2019
NasdaqGM:RPD Historical Debt, July 31st 2019

How Strong Is Rapid7's Balance Sheet?

We can see from the most recent balance sheet that Rapid7 had liabilities of US$228.4m falling due within a year, and liabilities of US$246.6m due beyond that. Offsetting these obligations, it had cash of US$251.5m as well as receivables valued at US$60.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$163.5m.

Of course, Rapid7 has a market capitalization of US$3.06b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Rapid7 also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Rapid7'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.

In the last year Rapid7 managed to grow its revenue by 25%, to US$263m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Rapid7?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Rapid7 had negative earnings before interest and tax (EBIT), truth be told. Indeed, in that time it burnt through US$38m of cash and made a loss of US$51m. While this does make the company a bit risky, it's important to remember it has net cash of US$251m. That kitty means the company can keep spending for growth for at least five years, at current rates. Rapid7's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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 Rapid7 insider transactions.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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.