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Purple Innovation (NASDAQ:PRPL) Has A Pretty Healthy Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Purple Innovation, Inc. (NASDAQ:PRPL) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Purple Innovation

What Is Purple Innovation's Debt?

As you can see below, at the end of March 2021, Purple Innovation had US$44.2m of debt, up from US$37.6m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$103.8m in cash, so it actually has US$59.6m net cash.

debt-equity-history-analysis
debt-equity-history-analysis

How Healthy Is Purple Innovation's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Purple Innovation had liabilities of US$114.7m due within 12 months and liabilities of US$294.6m due beyond that. Offsetting this, it had US$103.8m in cash and US$41.6m in receivables that were due within 12 months. So its liabilities total US$263.8m more than the combination of its cash and short-term receivables.

Given Purple Innovation has a market capitalization of US$1.65b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Purple Innovation also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Purple Innovation grew its EBIT by 326% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Purple Innovation can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Purple Innovation has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last two years, Purple Innovation's free cash flow amounted to 42% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While Purple Innovation does have more liabilities than liquid assets, it also has net cash of US$59.6m. And we liked the look of last year's 326% year-on-year EBIT growth. So is Purple Innovation's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Purple Innovation has 3 warning signs we think you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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