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Is Twilio (NYSE:TWLO) Using Too Much Debt?

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. So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Twilio Inc. (NYSE:TWLO) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

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See our latest analysis for Twilio

How Much Debt Does Twilio Carry?

The image below, which you can click on for greater detail, shows that at December 2019 Twilio had debt of US$458.2m, up from US$434.5m in one year. However, it does have US$1.85b in cash offsetting this, leading to net cash of US$1.39b.

NYSE:TWLO Historical Debt April 22nd 2020
NYSE:TWLO Historical Debt April 22nd 2020

How Healthy Is Twilio's Balance Sheet?

According to the last reported balance sheet, Twilio had liabilities of US$247.2m due within 12 months, and liabilities of US$623.9m due beyond 12 months. Offsetting these obligations, it had cash of US$1.85b as well as receivables valued at US$154.1m due within 12 months. So it actually has US$1.14b more liquid assets than total liabilities.

This surplus suggests that Twilio has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Twilio boasts net cash, 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 ultimately the future profitability of the business will decide if Twilio 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.

In the last year Twilio wasn't profitable at an EBIT level, but managed to grow its revenue by 75%, to US$1.1b. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Twilio?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Twilio had negative earnings before interest and tax (EBIT), truth be told. Indeed, in that time it burnt through US$53m of cash and made a loss of US$307m. While this does make the company a bit risky, it's important to remember it has net cash of US$1.39b. That kitty means the company can keep spending for growth for at least two years, at current rates. Twilio's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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. For instance, we've identified 4 warning signs for Twilio (1 is concerning) you should be aware of.

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.