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.’ 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 note that Slack Technologies, Inc. (NYSE:WORK) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Slack Technologies’s Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of January 2021 Slack Technologies had US$651.4m of debt, an increase on none, over one year. But on the other hand it also has US$1.59b in cash, leading to a US$935.9m net cash position.
A Look At Slack Technologies’ Liabilities
Zooming in on the latest balance sheet data, we can see that Slack Technologies had liabilities of US$697.1m due within 12 months and liabilities of US$879.1m due beyond that. Offsetting these obligations, it had cash of US$1.59b as well as receivables valued at US$237.4m due within 12 months. So it can boast US$248.4m more liquid assets than total liabilities.
Having regard to Slack Technologies’ size, it seems that its liquid assets are well balanced with its total liabilities. So while it’s hard to imagine that the US$25.5b company is struggling for cash, we still think it’s worth monitoring its balance sheet. Simply put, the fact that Slack Technologies has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Slack Technologies can strengthen its balance sheet over time. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Slack Technologies reported revenue of US$903m, which is a gain of 43%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is Slack Technologies?
While Slack Technologies lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$60m. 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. Keeping in mind its 43% revenue growth over the last year, we think there’s a decent chance the company is on track. We’d see further strong growth as an optimistic indication. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet – far from it. For example – Slack Technologies has 3 warning signs we think you should be aware of.
At the end of the day, it’s often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It’s free.
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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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