Here’s why Fastly (NYSE: FSLY) can afford to go into debt
Warren Buffett said: “Volatility is far from synonymous with risk”. It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Like many other companies Quickly, Inc. (NYSE: FSLY) uses debt. But the real question is whether this debt makes the business risky.
When Is Debt a Problem?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
What is Fastly’s debt?
The image below, which you can click for more details, shows that as of June 2021 Fastly was in debt of $ 931.4 million, up from $ 20.1 million in a year. However, given that it has a cash reserve of US $ 929.7 million, its net debt is less, at around US $ 1.66 million.
NYSE: FSLY Debt to Equity History September 24, 2021
Is Fastly’s track record healthy?
According to the latest published balance sheet, Fastly had liabilities of US $ 103.0 million due within 12 months and liabilities of US $ 1.00 billion due beyond 12 months. On the other hand, it had US $ 929.7 million in cash and US $ 56.1 million in receivables due within one year. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by $ 122.0 million.
Of course, Fastly has a market cap of US $ 4.97 billion, so this liability is probably manageable. Having said that, it is clear that we must continue to monitor his record lest it get worse. Having virtually no net debt, Fastly does indeed have very low debt. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is future profits, more than anything, that will determine Fastly’s ability to maintain a healthy balance sheet in the future. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Year over 12 months, Fastly reported revenue of US $ 323 million, a gain of 31%, although it reported no profit before interest and taxes. Hopefully the business will be able to move towards profitability.
While we can certainly appreciate Fastly’s revenue growth, its earnings before interest and taxes (EBIT) are not ideal. To be precise, the EBIT loss amounted to US $ 165 million. Considering that besides the liabilities mentioned above, we are not convinced that the company should use so much debt. Quite frankly, we believe the record is far from up to par, although it could improve over time. However, it doesn’t help that he spent $ 69 million in cash in the past year. Suffice it to say that we consider the action risky. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. For example, we have identified 4 warning signs for Fastly that you need to be aware of.
At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
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