Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about. 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. Importantly, Blue Apron Holdings, Inc. (NYSE:APRN) does carry debt. But the more important question is: how much risk is that debt creating?
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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Blue Apron Holdings Carry?
The image below, which you can click on for greater detail, shows that Blue Apron Holdings had debt of US$82.7m at the end of September 2019, a reduction from US$196.7m over a year. But on the other hand it also has US$85.9m in cash, leading to a US$3.18m net cash position.
How Strong Is Blue Apron Holdings's Balance Sheet?
We can see from the most recent balance sheet that Blue Apron Holdings had liabilities of US$93.9m falling due within a year, and liabilities of US$138.7m due beyond that. On the other hand, it had cash of US$85.9m and US$683.0k worth of receivables due within a year. So its liabilities total US$146.0m more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the US$95.2m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Blue Apron Holdings would probably need a major re-capitalization if its creditors were to demand repayment. Blue Apron Holdings boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. 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 Blue Apron Holdings'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.
In the last year Blue Apron Holdings had negative earnings before interest and tax, and actually shrunk its revenue by 30%, to US$501m. That makes us nervous, to say the least.
So How Risky Is Blue Apron Holdings?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Blue Apron Holdings had negative earnings before interest and tax (EBIT), over the last year. And over the same period it saw negative free cash outflow of US$34m and booked a US$63m accounting loss. However, it has net cash of US$3.18m, so it has a bit of time before it will need more capital. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. For riskier companies like Blue Apron Holdings I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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