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Is Castlight Health (NYSE:CSLT) Using Debt In A Risky Way?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Castlight Health, Inc. (NYSE:CSLT) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company 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 and debt together.

Check out our latest analysis for Castlight Health

What Is Castlight Health's Debt?

You can click the graphic below for the historical numbers, but it shows that Castlight Health had US$2.32m of debt in June 2020, down from US$4.18m, one year before. However, its balance sheet shows it holds US$44.3m in cash, so it actually has US$42.0m net cash.

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

A Look At Castlight Health's Liabilities

The latest balance sheet data shows that Castlight Health had liabilities of US$41.5m due within a year, and liabilities of US$11.6m falling due after that. Offsetting these obligations, it had cash of US$44.3m as well as receivables valued at US$33.2m due within 12 months. So it can boast US$24.3m more liquid assets than total liabilities.

It's good to see that Castlight Health has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Castlight Health boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Castlight Health's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Castlight Health made a loss at the EBIT level, and saw its revenue drop to US$146m, which is a fall of 4.6%. We would much prefer see growth.

So How Risky Is Castlight Health?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Castlight Health had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$19m of cash and made a loss of US$82m. However, it has net cash of US$42.0m, so it has a bit of time before it will need more capital. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. Be aware that Castlight Health is showing 3 warning signs in our investment analysis , you should know about...

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.

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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