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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. 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, Five9, Inc. (NASDAQ:FIVN) does carry debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
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What Is Five9's Debt?
The image below, which you can click on for greater detail, shows that at December 2019 Five9 had debt of US$209.6m, up from US$196.8m in one year. But it also has US$319.9m in cash to offset that, meaning it has US$110.3m net cash.
How Strong Is Five9's Balance Sheet?
The latest balance sheet data shows that Five9 had liabilities of US$66.0m due within a year, and liabilities of US$219.9m falling due after that. Offsetting these obligations, it had cash of US$319.9m as well as receivables valued at US$38.5m due within 12 months. So it actually has US$72.5m more liquid assets than total liabilities.
Having regard to Five9's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$4.55b 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.
Importantly, Five9's EBIT fell a jaw-dropping 43% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. 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.