Li Lu, the external fund manager supported by Berkshire Hathaway’s Charlie Munger, underscores the significance of avoiding permanent capital loss when assessing investment risks. Evaluating a company’s balance sheet is a natural step in gauging risk, as debt often plays a role in business dynamics. For Roblox Corporation (NYSE: RBLX), the focus is determining whether its use of debt introduces substantial risk.
Debt can be a business growth tool, yet its mismanagement can lead to severe consequences. If a company struggles to repay lenders, it risks being controlled by them, or in a less extreme scenario, may need to raise new equity capital at a reduced price, thereby diluting shareholder value.
Examining its debt levels with its financial resources is crucial to evaluating Roblox’s risk profile.
As of December 2023, Roblox carries approximately US$1.01 billion in debt, similar to the previous year, but it also holds US$2.19 billion in cash, resulting in a net cash position of US$1.19 billion. The balance sheet reveals liabilities of US$3.05 billion due within and beyond 12 months, partially offset by US$2.19 billion in cash and US$505.8 million in receivables due within 12 months.
This leaves a net imbalance of US$3.40 billion, a notable figure but manageable given Roblox’s substantial market capitalization of US$28.2 billion.
While the company demonstrated revenue growth of 26%, reaching US$2.8 billion in the past year, it incurred earnings before interest and tax (EBIT) loss.
However, Roblox generated a positive free cash flow of US$124 million, contributing to a favorable near-term risk outlook. The company’s ongoing revenue growth supports its potential to navigate challenges and raise capital if necessary.
Some risks persist despite the manageable debt load and positive free cash flow. Investors should remain vigilant, considering balance sheet dynamics and other potential pitfalls. Roblox’s ability to achieve profitability in the future will play a crucial role in strengthening its overall financial position. Investors can refer to a free report on analyst profit forecasts for a more comprehensive analysis.
Additionally, it’s essential to acknowledge that all investments come with inherent risks, some of which may take time to be evident. In the case of Roblox, four warning signs, including one of mild concern, have been identified and should be considered. For investors inclined towards stocks with minimal debt burdens, an exclusive list of net cash growth stocks is available for exploration.