Why Square Inc’s (NYSE:SQ) Timely Capital Raise Will Get It Through COVID-19

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Square Inc (NYSE:SQ) is a great example of how important it is to have cash reserves during a crisis. With a number of companies, both large and small, filing for bankruptcy in the last 2 months, having cash on hand can literally make or break a business. In the unlikely (but as we now know, possible) event that a company’s revenues fall drastically from unforeseen circumstances, it is incredibly important to have sufficient resources to be able to weather the storm and make it out in one piece on the other side.” data-reactid=”19″>Square Inc (NYSE:SQ) is a great example of how important it is to have cash reserves during a crisis. With a number of companies, both large and small, filing for bankruptcy in the last 2 months, having cash on hand can literally make or break a business. In the unlikely (but as we now know, possible) event that a company’s revenues fall drastically from unforeseen circumstances, it is incredibly important to have sufficient resources to be able to weather the storm and make it out in one piece on the other side.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="What Square Did” data-reactid=”20″>What Square Did

Square sold USD $1bn of convertible notes to a private placement of institutional buyers on 5th March 2020. The notes are due on the 1st of March 2025, they bear an interest rate of 0.125% and are convertible at a price of ~$121per share, subject to some terms. Put simply, Square raised just shy of $1bn in cash on very favorable terms just prior to the market crash and before the global economy came to a screeching halt.

Square’s business involves two ecosystems; the Cash App and its Seller ecosystem, the latter of which would have taken quite a large toll on earnings given the global shutdown of retailers, restaurants, and the like. If Square had to raise money in a panic after the shutdowns had occurred, it’s likely that the terms received would have been far less favorable (that is if they had been able to raise the money at all).

From the latest figures we can see in the image below, Square now has USD $2.5bn in cash and short term equivalents, which is larger than the company’s debt of USD $1.8bn. That being the case, the company has the ability to not only meet its obligations but also has somewhat prepared for the likely decline in revenue from its Seller ecosystem.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Raising Cheap Debt” data-reactid=”36″>Raising Cheap Debt

While we aren’t the biggest fans of debt, it can be quite useful to raise money, especially if it can be done on favorable terms where the money is incredibly cheap. Profitable companies, such as MasterCard (NYSE:MA) have even raised money in the last 3 months at pretty favorable terms. This is because if the business is profitable and the cost of borrowing is low, the debt can be easily serviced and the cash acquired can be put to use in the crisis to either take advantage of good opportunities or simply provide much-needed liquidity before funds dry up.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Be Aware Of The Risks” data-reactid=”38″>Be Aware Of The Risks

Not all debt is the same though. The terms of the debt can turn a relatively healthy balance sheet into a weak one. Depending on how the debt is issued, there can be a large number of clauses that can increase the risks for the company raising the money. They’re also known as debt covenants and can include the need for a company to maintain a certain level of interest coverage so that the lender feels secure that the debt can be serviced by the borrower. Since debt can be complicated, it’s worth knowing what the terms are for a company that is looking to raise money.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="In Summary” data-reactid=”40″>In Summary

As a business, you’d ideally want to build your cash buffers by saving a portion of your income. In some cases for high-growth stocks like Square, this isn’t the best use of its earnings because it’s growing incredibly quickly and it’s better off reinvesting in the business because it’ll likely get a high return. That’s why, when it comes to having a cash buffer before a downturn, raising money on favorable terms is quite a sound strategy.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="With that in mind, Square isn’t the only fast-growing stock we’ve noticed, check out the list of similar companies we’ve compiled here.” data-reactid=”42″>With that in mind, Square isn’t the only fast-growing stock we’ve noticed, check out the list of similar companies we’ve compiled here.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. ” data-reactid=”43″>If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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.