Does Despegar.com (NYSE:DESP) Have A Healthy Balance Sheet?
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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Despegar.com, Corp. (NYSE:DESP) does use debt in its business. 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 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Despegar.com
What Is Despegar.com's Net Debt?
As you can see below, at the end of March 2022, Despegar.com had US$22.7m of debt, up from US$15.9m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$235.2m in cash, so it actually has US$212.5m net cash.
How Strong Is Despegar.com's Balance Sheet?
We can see from the most recent balance sheet that Despegar.com had liabilities of US$479.9m falling due within a year, and liabilities of US$217.6m due beyond that. On the other hand, it had cash of US$235.2m and US$143.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$319.3m.
Despegar.com has a market capitalization of US$565.0m, so it could very likely raise cash to ameliorate 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, 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 reported revenue of US$383m, which is a gain of 258%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!
So How Risky Is Despegar.com?
We have no doubt that loss making companies are, in general, riskier than profitable ones. 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$27m and booked a US$127m accounting loss. With only US$212.5m on the balance sheet, it would appear that its going to need to raise capital again soon. Importantly, Despegar.com's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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 Despegar.com is showing 1 warning sign in our investment analysis , you should know about...
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.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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