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. 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. As with many other companies Snap Inc. (NYSE:SNAP) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Snap's Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2019 Snap had US$880.4m of debt, an increase on none, over one year. But on the other hand it also has US$2.26b in cash, leading to a US$1.38b net cash position.
How Strong Is Snap's Balance Sheet?
We can see from the most recent balance sheet that Snap had liabilities of US$369.1m falling due within a year, and liabilities of US$1.17b due beyond that. On the other hand, it had cash of US$2.26b and US$374.1m worth of receivables due within a year. So it can boast US$1.09b more liquid assets than total liabilities.
This short term liquidity is a sign that Snap could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Snap 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 ultimately the future profitability of the business will decide if Snap can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Snap wasn't profitable at an EBIT level, but managed to grow its revenue by43%, to US$1.5b. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Snap?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Snap had negative earnings before interest and tax (EBIT), truth be told. Indeed, in that time it burnt through US$417m of cash and made a loss of US$985m. While this does make the company a bit risky, it's important to remember it has net cash of US$1.38b. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, Snap may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. For riskier companies like Snap I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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