Five9 (NASDAQ:FIVN) Has A Rock Solid Balance Sheet
The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Five9, Inc. (NASDAQ:FIVN) does carry debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.
View our latest analysis for Five9
What Is Five9's Net Debt?
As you can see below, Five9 had US$203.1m of debt, at June 2019, which is about the same the year before. You can click the chart for greater detail. But it also has US$307.5m in cash to offset that, meaning it has US$104.4m net cash.
How Healthy Is Five9's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Five9 had liabilities of US$56.0m due within 12 months and liabilities of US$213.2m due beyond that. Offsetting these obligations, it had cash of US$307.5m as well as receivables valued at US$28.7m due within 12 months. So it actually has US$67.0m more liquid assets than total liabilities.
This state of affairs indicates that Five9's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$3.36b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Five9 has more cash than debt is arguably a good indication that it can manage its debt safely.
Pleasingly, Five9 is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 258% gain in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Five9 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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Five9 may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Five9 actually produced more free cash flow than EBIT over the last two years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that Five9 has net cash of US$104.4m, as well as more liquid assets than liabilities. The cherry on top was that in converted 489% of that EBIT to free cash flow, bringing in US$26m. So is Five9's debt a risk? It doesn't seem so to us. Another factor that would give us confidence in Five9 would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.
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.
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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.
