Is Freshpet (NASDAQ:FRPT) Weighed On By Its Debt Load?
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Freshpet, Inc. (NASDAQ:FRPT) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Freshpet
What Is Freshpet's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2022 Freshpet had US$75.5m of debt, an increase on none, over one year. But on the other hand it also has US$327.2m in cash, leading to a US$251.7m net cash position.
A Look At Freshpet's Liabilities
We can see from the most recent balance sheet that Freshpet had liabilities of US$70.8m falling due within a year, and liabilities of US$70.0m due beyond that. Offsetting these obligations, it had cash of US$327.2m as well as receivables valued at US$62.1m due within 12 months. So it actually has US$248.4m more liquid assets than total liabilities.
This short term liquidity is a sign that Freshpet could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Freshpet 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 Freshpet'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.
In the last year Freshpet wasn't profitable at an EBIT level, but managed to grow its revenue by 35%, to US$502m. With any luck the company will be able to grow its way to profitability.
So How Risky Is Freshpet?
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 Freshpet lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$364m of cash and made a loss of US$49m. However, it has net cash of US$251.7m, so it has a bit of time before it will need more capital. With very solid revenue growth in the last year, Freshpet may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Freshpet has 2 warning signs we think you should be aware of.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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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