Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Extreme Networks, Inc. (NASDAQ:EXTR) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Extreme Networks Carry?
As you can see below, Extreme Networks had US$178.8m of debt at June 2019, down from US$197.8m a year prior. However, because it has a cash reserve of US$169.6m, its net debt is less, at about US$9.14m.
A Look At Extreme Networks's Liabilities
According to the last reported balance sheet, Extreme Networks had liabilities of US$356.0m due within 12 months, and liabilities of US$284.9m due beyond 12 months. Offsetting these obligations, it had cash of US$169.6m as well as receivables valued at US$174.4m due within 12 months. So its liabilities total US$296.9m more than the combination of its cash and short-term receivables.
While this might seem like a lot, it is not so bad since Extreme Networks has a market capitalization of US$881.9m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. But either way, Extreme Networks has virtually no net debt, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Extreme Networks's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Extreme Networks's revenue was pretty flat. While that hardly impresses, its not too bad either.
Importantly, Extreme Networks had negative earnings before interest and tax (EBIT), over the last year. To be specific the EBIT loss came in at US$4.4m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of-US$25.9m into a profit. So in short it's a really risky stock. 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 Extreme Networks insider transactions.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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