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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Despegar.com, Corp. (NYSE:DESP) makes use of debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Despegar.com Carry?
You can click the graphic below for the historical numbers, but it shows that Despegar.com had US$15.9m of debt in March 2021, down from US$17.5m, one year before. However, it does have US$309.4m in cash offsetting this, leading to net cash of US$293.5m.
How Healthy Is Despegar.com's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Despegar.com had liabilities of US$355.3m due within 12 months and liabilities of US$231.8m due beyond that. Offsetting these obligations, it had cash of US$309.4m as well as receivables valued at US$60.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$217.3m.
While this might seem like a lot, it is not so bad since Despegar.com has a market capitalization of US$868.3m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Despegar.com also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 Despegar.com'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, Despegar.com made a loss at the EBIT level, and saw its revenue drop to US$107m, which is a fall of 77%. That makes us nervous, to say the least.
So How Risky Is Despegar.com?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Despegar.com lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$68m and booked a US$172m accounting loss. Given it only has net cash of US$293.5m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Despegar.com's profit, revenue, and operating cashflow have changed over the last few years.
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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