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 Casper Sleep Inc. (NYSE:CSPR) makes use of debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
What Is Casper Sleep's Net Debt?
The image below, which you can click on for greater detail, shows that at June 2020 Casper Sleep had debt of US$65.9m, up from US$14.0m in one year. But it also has US$98.2m in cash to offset that, meaning it has US$32.4m net cash.
How Strong Is Casper Sleep's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Casper Sleep had liabilities of US$121.2m due within 12 months and liabilities of US$74.0m due beyond that. Offsetting these obligations, it had cash of US$98.2m as well as receivables valued at US$23.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$73.6m.
This deficit isn't so bad because Casper Sleep is worth US$313.6m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Casper Sleep also has more cash than debt, so we're pretty confident 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 Casper Sleep 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.
In the last year Casper Sleep wasn't profitable at an EBIT level, but managed to grow its revenue by 24%, to US$478m. With any luck the company will be able to grow its way to profitability.
So How Risky Is Casper Sleep?
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 Casper Sleep lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$106m and booked a US$107m accounting loss. Given it only has net cash of US$32.4m, the company may need to raise more capital if it doesn't reach break-even soon. Casper Sleep's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Casper Sleep is showing 2 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...
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.
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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