The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. Importantly, eXp World Holdings, Inc. (NASDAQ:EXPI) does carry debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is eXp World Holdings's Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2019 eXp World Holdings had US$2.78m of debt, an increase on none, over one year. But it also has US$34.7m in cash to offset that, meaning it has US$32.0m net cash.
How Strong Is eXp World Holdings's Balance Sheet?
According to the last reported balance sheet, eXp World Holdings had liabilities of US$50.1m due within 12 months, and liabilities of US$2.92m due beyond 12 months. Offsetting this, it had US$34.7m in cash and US$36.0m in receivables that were due within 12 months. So it can boast US$17.8m more liquid assets than total liabilities.
This surplus suggests that eXp World Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that eXp World Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine eXp World Holdings'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, eXp World Holdings reported revenue of US$856m, which is a gain of 115%, although it did not report any earnings before interest and tax. So there's no doubt that shareholders are cheering for growth
So How Risky Is eXp World Holdings?
While eXp World Holdings lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$41m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Keeping in mind its 115% revenue growth over the last year, we think there's a decent chance the company is on track. There's no doubt fast top line growth can cure all manner of ills, for a stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider risks, for instance. Every company has them, and we've spotted 2 warning signs for eXp World Holdings you should know about.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned.
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