DocuSign (NASDAQ: DOCU) has debt but no profit; Should we be worried?

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Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital”. It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. We can see that DocuSign, Inc. (NASDAQ: DOCU) uses debt in his business. But does this debt concern shareholders?

When is debt dangerous?

Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, debt can be an important tool in businesses, especially capital intensive businesses. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.

See our latest review for DocuSign

What is DocuSign’s debt?

As you can see below, at the end of July 2020, DocuSign had $ 479.1 million in debt, up from $ 451.9 million a year ago. Click on the image for more details. However, it has US $ 674.0 million in cash offsetting this, which leads to a net cash position of US $ 194.9 million.

debt-equity-historical-analysis

debt-equity-historical-analysis

Is DocuSign’s track record healthy?

Zooming in on the latest balance sheet data, we can see that DocuSign had a liability of US $ 854.0 million due within 12 months and a liability of US $ 697.4 million beyond. In return, he had $ 674.0 million in cash and $ 241.5 million in receivables due within 12 months. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by $ 635.8 million.

Considering the size of DocuSign, it appears that its liquid assets are well balanced with its total liabilities. So while it’s hard to imagine the $ 42.9 billion company struggling to get cash, we still think it’s worth watching its balance sheet. Despite its notable liabilities, DocuSign has a net cash flow, so it’s fair to say that it doesn’t have a heavy debt load! There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether DocuSign can strengthen its balance sheet over time. So if you want to see what the professionals are thinking, you might find this free report on analysts’ earnings forecasts Be interesting.

Year over year, DocuSign reported revenue of US $ 1.2 billion, a 40% gain, although it reported no earnings before interest and taxes. The shareholders are probably keeping their fingers crossed that this could generate a profit.

So how risky is DocuSign?

Although DocuSign recorded a loss of earnings before interest and taxes (EBIT) over the past twelve months, it generated positive free cash flow of US $ 134 million. Thus, although it is in deficit, it does not appear to present too much short-term balance sheet risk, given the net cash position. The good news for DocuSign shareholders is that its revenue growth is strong, making it easier to raise capital when needed. But that doesn’t change our opinion that the title is risky. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. Be aware that DocuSign is displayed 3 warning signs in our investment analysis , you must know…

If, after all of this, you’re more interested in a fast-growing company with a rock-solid balance sheet, then check out our list of cash net growth stocks without delay.

This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.

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