Is Despegar.com (NYSE:DESP) A Risky Investment?
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. We note that Despegar.com, Corp. (NYSE:DESP) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Despegar.com
What Is Despegar.com's Debt?
You can click the graphic below for the historical numbers, but it shows that Despegar.com had US$7.22m of debt in September 2020, down from US$18.0m, one year before. However, its balance sheet shows it holds US$375.3m in cash, so it actually has US$368.0m net cash.
A Look At Despegar.com's Liabilities
We can see from the most recent balance sheet that Despegar.com had liabilities of US$227.2m falling due within a year, and liabilities of US$148.5m due beyond that. On the other hand, it had cash of US$375.3m and US$67.5m worth of receivables due within a year. So it can boast US$67.1m more liquid assets than total liabilities.
This surplus suggests that Despegar.com has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Despegar.com boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Despegar.com'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.
Over 12 months, Despegar.com made a loss at the EBIT level, and saw its revenue drop to US$224m, which is a fall of 56%. That makes us nervous, to say the least.
So How Risky Is Despegar.com?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Despegar.com had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$82m of cash and made a loss of US$118m. With only US$368.0m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. Take risks, for example - Despegar.com has 2 warning signs we think 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. 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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