David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. We can see that HubSpot, Inc. (NYSE: HUBS) uses debt in its operations. But should shareholders worry about its use of debt?
When is debt a problem?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. When we think about a company’s use of debt, we first look at cash and debt together.
See our latest analysis for HubSpot
What is HubSpot’s debt?
The image below, which you can click on for more details, shows that in March 2022, HubSpot had $472.1 million in debt, up from $444.4 million in one year. However, he has $1.23 billion in cash to offset that, which translates to net cash of $762.8 million.
How healthy is HubSpot’s balance sheet?
The latest balance sheet data shows that HubSpot had liabilities of $662.0 million due within the year, and liabilities of $757.5 million due thereafter. On the other hand, it had a cash position of 1.23 billion dollars and 152.7 million dollars of receivables at less than one year. It therefore has liabilities totaling $31.9 million more than its cash and short-term receivables, combined.
This state of affairs indicates that HubSpot’s balance sheet looks quite strong, as its total liabilities roughly equal its liquid assets. So while it’s hard to imagine the US$14.4 billion company struggling for cash, we still think it’s worth keeping an eye on its balance sheet. Despite its notable liabilities, HubSpot has a net cash position, so it’s fair to say that it doesn’t have a lot of debt! When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether HubSpot can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Year-over-year, HubSpot reported revenue of $1.4 billion, a 47% gain, although it reported no earnings before interest and taxes. The shareholders probably have their fingers crossed that she can make a profit.
So how risky is HubSpot?
Although HubSpot posted a loss in earnings before interest and taxes (EBIT) over the last twelve months, it generated positive free cash flow of $188 million. So, although it is loss-making, it does not seem to have too much short-term balance sheet risk, given net cash. One bright spot is that HubSpot is growing revenue quickly, making it easy to sell a growth story and raise capital if needed. But we still think it’s somewhat risky. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. To this end, you should be aware of the 2 warning signs we spotted with HubSpot.
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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