Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Cardlytics, Inc. (NASDAQ:CDLX) makes use of debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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 Cardlytics Carry?
You can click the graphic below for the historical numbers, but it shows that as of September 2020 Cardlytics had US$171.5m of debt, an increase on none, over one year. However, its balance sheet shows it holds US$287.6m in cash, so it actually has US$116.1m net cash.
How Strong Is Cardlytics's Balance Sheet?
The latest balance sheet data shows that Cardlytics had liabilities of US$58.3m due within a year, and liabilities of US$180.8m falling due after that. Offsetting this, it had US$287.6m in cash and US$59.1m in receivables that were due within 12 months. So it actually has US$107.6m more liquid assets than total liabilities.
This surplus suggests that Cardlytics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Cardlytics 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 Cardlytics'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, Cardlytics saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.
So How Risky Is Cardlytics?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Cardlytics lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$20m of cash and made a loss of US$45m. While this does make the company a bit risky, it's important to remember it has net cash of US$116.1m. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. For example, we've discovered 4 warning signs for Cardlytics that you should be aware of before investing here.
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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