Is HubSpot (NYSE:HUBS) A Risky Investment?

Simply Wall St
·3 min read

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that HubSpot, Inc. (NYSE:HUBS) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for HubSpot

What Is HubSpot's Debt?

The image below, which you can click on for greater detail, shows that HubSpot had debt of US$400.1m at the end of September 2021, a reduction from US$474.0m over a year. However, it does have US$1.17b in cash offsetting this, leading to net cash of US$770.6m.

debt-equity-history-analysis
debt-equity-history-analysis

How Healthy Is HubSpot's Balance Sheet?

We can see from the most recent balance sheet that HubSpot had liabilities of US$549.8m falling due within a year, and liabilities of US$683.7m due beyond that. Offsetting these obligations, it had cash of US$1.17b as well as receivables valued at US$126.7m due within 12 months. So it can boast US$63.9m more liquid assets than total liabilities.

This state of affairs indicates that HubSpot's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$34.2b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that HubSpot has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if HubSpot 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 HubSpot wasn't profitable at an EBIT level, but managed to grow its revenue by 45%, to US$1.2b. With any luck the company will be able to grow its way to profitability.

So How Risky Is HubSpot?

While HubSpot lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$146m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Keeping in mind its 45% revenue growth over the last year, we think there's a decent chance the company is on track. We'd see further strong growth as an optimistic indication. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for HubSpot (of which 1 shouldn't be ignored!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.