Breakdown of Square’s balance sheet
Knowing how to read a balance sheet is an essential tool for all equity investors, and this is especially true when it comes to fast growing companies like Square (NYSE: SQ). In this Motley fool live Video clip, registered on 23 august, Fool.com contributor and certified financial planner Matt Frankel provides an overview of Square’s track record and the key things investors need to know.
Matt Frankel: Each financial report has three different financial statements. You have the balance sheet, the income statement and the cash flow statement. For new investors in particular, I still consider the first two, the balance sheet and the income statement, to be the most telling. In terms of really trying to get a feel for the business. You can look at the cash flow statement, but I’ll be spending most of my time on the first two. On the balance sheet, the first thing to look at here, and I think you might see my milestone when I share my screen here, is the money a business has.
This is really important, especially for high growth companies that aren’t always profitable like Square was in the last quarter, but I wouldn’t call them a consistently profitable business at this point. They definitely favor growth over profits. You want to make sure the business has a ton of cash flow relative to its capital spending needs. Square has around $ 4.6 billion in cash, which is pretty impressive. They have a bunch of other different sources of short-term assets, but a lot of them aren’t really theirs, if you look four lines down, client funds, for example, the second biggest source , it’s the money that customers put into their money and stuff like that. The amount of cash, not the assets, but the cash and cash equivalents is really what they have to invest, to make acquisitions, to spend on marketing, things like that.
Going down to the next section. Your review is divided into two sections. You have assets at the top and liabilities here. Then at the bottom you have equity, where the same section is. The key figure to pay attention to in the liabilities. Many of the first lines are temporary phases. Customers pay is money they have on their balance sheet, but it goes to someone else. One of their clients as payment. Payables, accrued liabilities, things like that, PPP facility advances, obviously it’s a temporary thing that’s on the balance sheet. These are current liabilities. Current liabilities are generally defined as anything that is going to be due in a year. Ditto for short-term assets which are anything they could easily liquidate or which will become liquid in a year.
Long-term debt is the real telling number in this section. But with Square. I’ll put a big asterisk on it. At first glance, Square has $ 4.6 billion in cash and just over $ 4.8 billion in debt. Most of this debt is at very little interest. You will see on the next page what they are interested in. It is almost nothing. That’s because almost all of Square comes in the form of convertible bonds. This means that they sell bonds to people who pay very little interest, but with the promise of being able to convert them into common stock if the price goes up to a certain amount. To give just one example. In November, they made a convertible debt offer of $ 1 billion that pays 0.25% per annum. They pretty much get that money for free. It will be convertible into shares at a share price, that’s around $ 299. In the worst case, shareholders will end up deluding themselves a bit.
But for this to happen, the price of your action must increase significantly. It’s a win-win for everyone. In the meantime, they get this almost free capital to be able to grow with it. These are the key points to note on the balance sheet.
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