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. When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that BlackBerry Limited (TSE:BB) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company’s use of debt, we first look at cash and debt together.

View our latest analysis for BlackBerry

What Is BlackBerry’s Debt?

As you can see below, BlackBerry had US$609.0m of debt at November 2019, down from US$665.0m a year prior. But on the other hand it also has US$882.0m in cash, leading to a US$273.0m net cash position.

TSX:BB Historical Debt, March 9th 2020
TSX:BB Historical Debt, March 9th 2020

How Healthy Is BlackBerry’s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that BlackBerry had liabilities of US$1.11b due within 12 months and liabilities of US$253.0m due beyond that. Offsetting this, it had US$882.0m in cash and US$239.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$244.0m.

Since publicly traded BlackBerry shares are worth a total of US$2.44b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, BlackBerry also has more cash than debt, so we’re pretty confident it can manage its debt safely. 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 BlackBerry 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.

Over 12 months, BlackBerry reported revenue of US$1.0b, which is a gain of 15%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is BlackBerry?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that BlackBerry had negative earnings before interest and tax (EBIT), over the last year. Indeed, in that time it burnt through US$34m of cash and made a loss of US$60m. Given it only has net cash of US$273.0m, the company may need to raise more capital if it doesn’t reach break-even soon. Summing up, we’re a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There’s no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example – BlackBerry has 3 warning signs we think you should be aware of.

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.

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