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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.' 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. As with many other companies Wix.com Ltd. (NASDAQ:WIX) makes use of debt. But should shareholders be worried about its use of debt?
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 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Wix.com Carry?
The image below, which you can click on for greater detail, shows that at December 2020 Wix.com had debt of US$834.4m, up from US$359.9m in one year. But on the other hand it also has US$1.04b in cash, leading to a US$201.5m net cash position.
How Strong Is Wix.com's Balance Sheet?
According to the last reported balance sheet, Wix.com had liabilities of US$617.0m due within 12 months, and liabilities of US$974.8m due beyond 12 months. Offsetting this, it had US$1.04b in cash and US$23.7m in receivables that were due within 12 months. So it has liabilities totalling US$532.2m more than its cash and near-term receivables, combined.
Since publicly traded Wix.com shares are worth a very impressive total of US$15.3b, it seems unlikely that this level of liabilities would be a major threat. 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, 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 it is future earnings, more than anything, that will determine Wix.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.
Over 12 months, Wix.com reported revenue of US$989m, which is a gain of 30%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Wix.com?
Although Wix.com had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$129m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. 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 we still think it's somewhat risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Wix.com that you should be aware of before investing here.
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.
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