Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Cogent Communications Holdings, Inc. (NASDAQ:CCOI) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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.

What Is Cogent Communications Holdings's Net Debt?

As you can see below, at the end of June 2024, Cogent Communications Holdings had US$1.44b of debt, up from US$996.4m a year ago. Click the image for more detail. However, it also had US$384.4m in cash, and so its net debt is US$1.05b.

How Strong Is Cogent Communications Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Cogent Communications Holdings had liabilities of US$313.0m due within 12 months and liabilities of US$2.62b due beyond that. Offsetting this, it had US$384.4m in cash and US$195.5m in receivables that were due within 12 months. So it has liabilities totalling US$2.35b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of US$3.26b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Cogent Communications Holdings'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.

In the last year Cogent Communications Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 52%, to US$1.0b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Cogent Communications Holdings still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$190m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$263m of cash over the last year. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 6 warning signs for Cogent Communications Holdings (4 shouldn't be ignored) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.