The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Despegar.com, Corp. (NYSE:DESP) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Despegar.com's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2021 Despegar.com had US$16.5m of debt, an increase on US$7.22m, over one year. But it also has US$263.2m in cash to offset that, meaning it has US$246.7m net cash.
How Strong Is Despegar.com's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Despegar.com had liabilities of US$403.1m due within 12 months and liabilities of US$222.5m due beyond that. Offsetting these obligations, it had cash of US$263.2m as well as receivables valued at US$103.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$258.9m.
While this might seem like a lot, it is not so bad since Despegar.com has a market capitalization of US$624.2m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Despegar.com boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Despegar.com'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.
Over 12 months, Despegar.com reported revenue of US$252m, which is a gain of 12%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is Despegar.com?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Despegar.com had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$98m and booked a US$127m accounting loss. Given it only has net cash of US$246.7m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Despegar.com , and understanding them should be part of your investment process.
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.
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