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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Marchex, Inc. (NASDAQ:MCHX) does use debt in its business. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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 Marchex's Net Debt?
The image below, which you can click on for greater detail, shows that at June 2020 Marchex had debt of US$5.29m, up from none in one year. However, it does have US$46.8m in cash offsetting this, leading to net cash of US$41.5m.
How Strong Is Marchex's Balance Sheet?
According to the last reported balance sheet, Marchex had liabilities of US$27.2m due within 12 months, and liabilities of US$6.00m due beyond 12 months. On the other hand, it had cash of US$46.8m and US$16.1m worth of receivables due within a year. So it actually has US$29.8m more liquid assets than total liabilities.
This luscious liquidity implies that Marchex's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Succinctly put, Marchex boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Marchex'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.
Over 12 months, Marchex reported revenue of US$104m, which is a gain of 8.4%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is Marchex?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Marchex had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$1.8m of cash and made a loss of US$31.0m. But the saving grace is the US$41.5m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. To that end, you should be aware of the 4 warning signs we've spotted with Marchex .
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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