Is Wix.com (NASDAQ:WIX) Using Too Much Debt?
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We can see that Wix.com Ltd. (NASDAQ:WIX) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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 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. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Wix.com
How Much Debt Does Wix.com Carry?
You can click the graphic below for the historical numbers, but it shows that as of June 2021 Wix.com had US$920.4m of debt, an increase on US$370.9m, over one year. However, its balance sheet shows it holds US$1.28b in cash, so it actually has US$358.8m net cash.
How Strong Is Wix.com's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Wix.com had liabilities of US$711.4m due within 12 months and liabilities of US$1.10b due beyond that. Offsetting these obligations, it had cash of US$1.28b as well as receivables valued at US$29.4m due within 12 months. So its liabilities total US$503.4m more than the combination of its cash and short-term receivables.
Of course, Wix.com has a titanic market capitalization of US$11.6b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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. 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 Wix.com's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Wix.com reported revenue of US$1.2b, which is a gain of 36%, 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?
While Wix.com lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$72m. 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. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Wix.com (at least 1 which is significant) , and understanding them should be part of your investment process.
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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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