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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Wayfair Inc. (NYSE:W) does carry debt. But the real question is whether this debt is making the company risky.
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Wayfair's Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2019 Wayfair had US$750.2m of debt, an increase on US$419.8m, over one year. But on the other hand it also has US$805.7m in cash, leading to a US$55.5m net cash position.
How Strong Is Wayfair's Balance Sheet?
The latest balance sheet data shows that Wayfair had liabilities of US$1.23b due within a year, and liabilities of US$1.36b falling due after that. On the other hand, it had cash of US$805.7m and US$60.6m worth of receivables due within a year. So its liabilities total US$1.73b more than the combination of its cash and short-term receivables.
Of course, Wayfair has a titanic market capitalization of US$12.1b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Wayfair also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Wayfair 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.
In the last year Wayfair managed to grow its revenue by 42%, to US$7.3b. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Wayfair?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Wayfair had negative earnings before interest and tax (EBIT), over the last year. Indeed, in that time it burnt through US$256m of cash and made a loss of US$597m. But the saving grace is the US$806m on the balance sheet. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, Wayfair may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Wayfair insider transactions.
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.
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