Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Wix.com Ltd. (NASDAQ:WIX) does carry debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Wix.com's Debt?
The image below, which you can click on for greater detail, shows that at March 2019 Wix.com had debt of US$344.1m, up from US$1.22m in one year. But it also has US$746.3m in cash to offset that, meaning it has US$402.2m net cash.
A Look At Wix.com's Liabilities
The latest balance sheet data shows that Wix.com had liabilities of US$391.0m due within a year, and liabilities of US$403.7m falling due after that. On the other hand, it had cash of US$746.3m and US$18.4m worth of receivables due within a year. So its liabilities total US$29.9m more than the combination of its cash and short-term receivables.
This state of affairs indicates that Wix.com's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$7.56b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Wix.com 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 Wix.com 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.
Over 12 months, Wix.com reported revenue of US$640m, which is a gain of 36%. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Wix.com?
While Wix.com lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$110m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. One positive is that Wix.com is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But that doesn't change our opinion that the stock is risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Wix.com's profit, revenue, and operating cashflow have changed over the last few years.
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.
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