- Oops!Something went wrong.Please try again later.
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Avalara, Inc. (NYSE:AVLR) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Avalara's Net Debt?
The image below, which you can click on for greater detail, shows that at September 2021 Avalara had debt of US$960.4m, up from none in one year. But on the other hand it also has US$1.54b in cash, leading to a US$576.3m net cash position.
How Healthy Is Avalara's Balance Sheet?
The latest balance sheet data shows that Avalara had liabilities of US$539.0m due within a year, and liabilities of US$1.06b falling due after that. Offsetting this, it had US$1.54b in cash and US$96.3m in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.
Having regard to Avalara's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$12.6b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Avalara has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Avalara can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Avalara reported revenue of US$649m, which is a gain of 40%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Avalara?
Although Avalara had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$21m. 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 think its revenue growth of 40% is a good sign. There's no doubt fast top line growth can cure all manner of ills, for a stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Avalara (1 makes us a bit uncomfortable) you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.