Would RingCentral (NYSE: RNG) fare better with less debt?
Howard Marks put it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Like many other companies RingCentral, Inc. (NYSE: RNG) uses debt. But the most important question is: what risk does this debt create?
When is Debt a Problem?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. If things really go wrong, lenders can take over the business. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we look at debt levels, we first look at cash and debt levels, together.
See our latest review for RingCentral
What is RingCentral’s debt?
The graph below, which you can click for more details, shows RingCentral owed US $ 1.38 billion in debt as of September 2021; about the same as the year before. However, given that it has a cash reserve of US $ 345.2 million, its net debt is less, at around US $ 1.04 billion.
A look at the responsibilities of RingCentral
The latest balance sheet data shows that RingCentral had liabilities of US $ 475.6 million due within one year, and liabilities of US $ 1.44 billion due after that. On the other hand, it had US $ 345.2 million in cash and US $ 216.1 million in receivables due within a year. It therefore has liabilities totaling US $ 1.36 billion more than its cash and short-term receivables combined.
Considering that publicly traded RingCentral shares are worth a very impressive US $ 18.0 billion total, it seems unlikely that this level of liabilities is a major threat. However, we think it’s worth keeping an eye on the strength of its balance sheet as it can change over time. When analyzing debt levels, the balance sheet is the obvious place to start. But it is future profits, more than anything, that will determine RingCentral’s ability to maintain a healthy balance sheet going forward. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Over the past year, RingCentral was unprofitable on an EBIT level, but managed to grow its revenue by 34%, to $ 1.5 billion. The shareholders are probably keeping their fingers crossed that this could generate a profit.
Even though RingCentral has managed to grow its revenue quite adroitly, the hard truth is that it is losing money on the EBIT line. To be precise, the EBIT loss amounted to US $ 227 million. Considering that besides the liabilities mentioned above, we are not convinced that the company should use so much debt. Quite frankly, we think the record is far from up to par, although it could improve over time. However, it doesn’t help that he spent $ 6.8 million in cash in the past year. Suffice it to say that we consider the action to be risky. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. Concrete example: we have spotted 3 warning signs for RingCentral you must be aware.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.