Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that ‘Volatility is far from synonymous with risk.’ 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 Phreesia, Inc. (NYSE:PHR) makes use of debt. But the real question is whether this debt is making the company risky.
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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Phreesia
What Is Phreesia’s Net Debt?
The image below, which you can click on for greater detail, shows that at October 2020 Phreesia had debt of US$21.6m, up from US$19.4m in one year. However, its balance sheet shows it holds US$254.1m in cash, so it actually has US$232.6m net cash.
How Healthy Is Phreesia’s Balance Sheet?
According to the last reported balance sheet, Phreesia had liabilities of US$41.8m due within 12 months, and liabilities of US$26.6m due beyond 12 months. On the other hand, it had cash of US$254.1m and US$27.6m worth of receivables due within a year. So it actually has US$213.3m more liquid assets than total liabilities.
This surplus suggests that Phreesia has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Phreesia boasts net cash, so it’s fair to say it does not have a heavy debt load! 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 Phreesia 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.
In the last year Phreesia wasn’t profitable at an EBIT level, but managed to grow its revenue by 18%, to US$140m. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is Phreesia?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Phreesia lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$14m of cash and made a loss of US$23m. While this does make the company a bit risky, it’s important to remember it has net cash of US$232.6m. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn’t seem overly risky, at the moment, but we’re always cautious until we see the positive free cash flow. 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. We’ve identified 4 warning signs with Phreesia , and understanding them should be part of your investment process.
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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