Yahoo Finance Is Proofpoint (NASDAQ:PFPT) Using Debt Sensibly?
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 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 Proofpoint, Inc. (NASDAQ:PFPT) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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. 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. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Proofpoint
What Is Proofpoint's Debt?
The image below, which you can click on for greater detail, shows that at September 2019 Proofpoint had debt of US$741.4m, up from US$61.0k in one year. However, it does have US$1.05b in cash offsetting this, leading to net cash of US$310.1m.
How Healthy Is Proofpoint's Balance Sheet?
According to the last reported balance sheet, Proofpoint had liabilities of US$684.4m due within 12 months, and liabilities of US$928.9m due beyond 12 months. Offsetting this, it had US$1.05b in cash and US$204.8m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$357.0m.
Of course, Proofpoint has a market capitalization of US$6.54b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Proofpoint also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Proofpoint 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, Proofpoint reported revenue of US$843m, which is a gain of 27%, 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 Proofpoint?
Although Proofpoint had negative earnings before interest and tax (EBIT) over the last twelve months, it generated positive free cash flow of US$191m. 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. The good news for Proofpoint shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But we still think it's somewhat risky. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Proofpoint insider transactions.
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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