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Stamps.com (NASDAQ:STMP) Seems To Use Debt Quite Sensibly

Simply Wall St

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 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, Stamps.com Inc. (NASDAQ:STMP) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Stamps.com

What Is Stamps.com's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Stamps.com had US$76.2m of debt in March 2019, down from US$83.4m, one year before. However, its balance sheet shows it holds US$110.9m in cash, so it actually has US$34.8m net cash.

NasdaqGS:STMP Historical Debt, August 5th 2019

How Strong Is Stamps.com's Balance Sheet?

According to the last reported balance sheet, Stamps.com had liabilities of US$141.4m due within 12 months, and liabilities of US$100.4m due beyond 12 months. Offsetting this, it had US$110.9m in cash and US$77.8m in receivables that were due within 12 months. So it has liabilities totalling US$53.1m more than its cash and near-term receivables, combined.

Since publicly traded Stamps.com shares are worth a total of US$792.6m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Stamps.com also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, Stamps.com saw its EBIT drop by 3.0% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its 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 Stamps.com'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Stamps.com may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Stamps.com actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

We could understand if investors are concerned about Stamps.com's liabilities, but we can be reassured by the fact it has has net cash of US$35m. The cherry on top was that in converted 123% of that EBIT to free cash flow, bringing in US$252m. So is Stamps.com's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Stamps.com, you may well want to click here to check an interactive graph of its earnings per share history.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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. Thank you for reading.