Yahoo Finance These 4 Measures Indicate That Mimecast (NASDAQ:MIME) Is Using Debt Reasonably Well
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. 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. We can see that Mimecast Limited (NASDAQ:MIME) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.
View our latest analysis for Mimecast
How Much Debt Does Mimecast Carry?
The chart below, which you can click on for greater detail, shows that Mimecast had US$94.0m in debt in December 2019; about the same as the year before. But it also has US$189.9m in cash to offset that, meaning it has US$95.9m net cash.
How Healthy Is Mimecast's Balance Sheet?
According to the last reported balance sheet, Mimecast had liabilities of US$269.3m due within 12 months, and liabilities of US$220.7m due beyond 12 months. On the other hand, it had cash of US$189.9m and US$80.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$220.0m.
Since publicly traded Mimecast shares are worth a total of US$2.23b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Mimecast also has more cash than debt, so we're pretty confident it can manage its debt safely.
Notably, Mimecast made a loss at the EBIT level, last year, but improved that to positive EBIT of US$1.1m in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Mimecast 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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Mimecast may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Mimecast actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
Summing up
We could understand if investors are concerned about Mimecast's liabilities, but we can be reassured by the fact it has has net cash of US$95.9m. The cherry on top was that in converted 3514% of that EBIT to free cash flow, bringing in US$39m. So we are not troubled with Mimecast's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Mimecast , and understanding them should be part of your investment process.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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