Does Crexendo (NASDAQ:CXDO) Have A Healthy Balance Sheet?
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that ‘Volatility is far from synonymous with risk.’ 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 Crexendo, Inc. (NASDAQ:CXDO) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can’t easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Crexendo
What Is Crexendo’s Net Debt?
As you can see below, Crexendo had US$1.93m of debt, at March 2021, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds US$16.2m in cash, so it actually has US$14.3m net cash.
A Look At Crexendo’s Liabilities
According to the last reported balance sheet, Crexendo had liabilities of US$4.13m due within 12 months, and liabilities of US$2.33m due beyond 12 months. On the other hand, it had cash of US$16.2m and US$1.12m worth of receivables due within a year. So it actually has US$10.9m more liquid assets than total liabilities.
This short term liquidity is a sign that Crexendo could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Crexendo has more cash than debt is arguably a good indication that it can manage its debt safely.
The modesty of its debt load may become crucial for Crexendo if management cannot prevent a repeat of the 26% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There’s no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Crexendo’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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Crexendo has net cash on its balance sheet, it’s still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Crexendo recorded free cash flow worth a fulsome 81% of its EBIT, which is stronger than we’d usually expect. That puts it in a very strong position to pay down debt.
Summing up
While it is always sensible to investigate a company’s debt, in this case Crexendo has US$14.3m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$265k, being 81% of its EBIT. So we don’t have any problem with Crexendo’s use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we’ve identified 3 warning signs for Crexendo (2 are potentially serious) 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.
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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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