Yahoo Finance Is Coupa Software (NASDAQ:COUP) Weighed On By Its Debt Load?
David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital. It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Coupa Software Incorporated (NASDAQ:COUP) does carry debt. But should shareholders be worried about its use of debt?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Coupa Software
What Is Coupa Software's Net Debt?
As you can see below, at the end of October 2019, Coupa Software had US$737.2m of debt, up from US$171.6m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$842.4m in cash, so it actually has US$105.2m net cash.
How Healthy Is Coupa Software's Balance Sheet?
The latest balance sheet data shows that Coupa Software had liabilities of US$452.2m due within a year, and liabilities of US$599.9m falling due after that. On the other hand, it had cash of US$842.4m and US$79.7m worth of receivables due within a year. So it has liabilities totalling US$130.1m more than its cash and near-term receivables, combined.
Having regard to Coupa Software's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$7.93b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Coupa Software boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Coupa Software can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Coupa Software wasn't profitable at an EBIT level, but managed to grow its revenue by 48%, to US$353m. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Coupa Software?
While Coupa Software lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$43m. 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. One positive is that Coupa Software is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But we still think it's somewhat risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 4 warning signs with Coupa Software (at least 1 which makes us a bit uncomfortable) , 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.
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.
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