Is AutoWeb (NASDAQ:AUTO) Using Too Much Debt?
David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We note that AutoWeb, Inc. (NASDAQ:AUTO) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does AutoWeb Carry?
As you can see below, at the end of March 2021, AutoWeb had US$10.3m of debt, up from US$6.71m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$11.2m in cash, so it actually has US$901.0k net cash.
How Strong Is AutoWeb's Balance Sheet?
The latest balance sheet data shows that AutoWeb had liabilities of US$21.5m due within a year, and liabilities of US$1.99m falling due after that. On the other hand, it had cash of US$11.2m and US$13.9m worth of receivables due within a year. So it can boast US$1.64m more liquid assets than total liabilities.
This surplus suggests that AutoWeb has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, AutoWeb boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine AutoWeb's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year AutoWeb had a loss before interest and tax, and actually shrunk its revenue by 35%, to US$70m. That makes us nervous, to say the least.
So How Risky Is AutoWeb?
Although AutoWeb had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$2.6m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that AutoWeb is showing 4 warning signs in our investment analysis , you should know about...
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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. 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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