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. 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. We can see that ANGI Homeservices Inc. (NASDAQ:ANGI) does use debt in its business. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.
What Is ANGI Homeservices's Net Debt?
As you can see below, at the end of September 2019, ANGI Homeservices had US$249.0m of debt, up from US$263 a year ago. Click the image for more detail. However, its balance sheet shows it holds US$402.9m in cash, so it actually has US$153.9m net cash.
How Healthy Is ANGI Homeservices's Balance Sheet?
We can see from the most recent balance sheet that ANGI Homeservices had liabilities of US$231.2m falling due within a year, and liabilities of US$358.3m due beyond that. On the other hand, it had cash of US$402.9m and US$44.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$142.6m.
Of course, ANGI Homeservices has a market capitalization of US$4.12b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, ANGI Homeservices also has more cash than debt, so we're pretty confident it can manage its debt safely.
Fortunately, ANGI Homeservices grew its EBIT by 4.1% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine ANGI Homeservices'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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. ANGI Homeservices may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, ANGI Homeservices actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
We could understand if investors are concerned about ANGI Homeservices's liabilities, but we can be reassured by the fact it has has net cash of US$153.9m. The cherry on top was that in converted 143% of that EBIT to free cash flow, bringing in US$183m. So we don't think ANGI Homeservices's use of debt is risky. We'd be very excited to see if ANGI Homeservices insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.
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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