Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ 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. We can see that eXp World Holdings, Inc. (NASDAQ:EXPI) 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. 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. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. When we think about a company’s use of debt, we first look at cash and debt together.
What Is eXp World Holdings’s Debt?
The image below, which you can click on for greater detail, shows that at September 2019 eXp World Holdings had debt of US$2.78m, up from none in one year. However, its balance sheet shows it holds US$34.7m in cash, so it actually has US$32.0m net cash.
How Strong Is eXp World Holdings’s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that eXp World Holdings had liabilities of US$50.1m due within 12 months and liabilities of US$2.92m due beyond that. Offsetting these obligations, it had cash of US$34.7m as well as receivables valued at US$36.0m due within 12 months. So it actually has US$17.8m more liquid assets than total liabilities.
This surplus suggests that eXp World Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, eXp World Holdings boasts net cash, so it’s fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine eXp World Holdings’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.
In the last year eXp World Holdings wasn’t profitable at an EBIT level, but managed to grow its revenue by 115%, to US$856m. So its pretty obvious shareholders are hoping for more growth!
So How Risky Is eXp World Holdings?
While eXp World Holdings lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$41m. 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. Keeping in mind its 115% revenue growth over the last year, we think there’s a decent chance the company is on track. There’s no doubt fast top line growth can cure all manner of ills, for a stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet – far from it. Be aware that eXp World Holdings is showing 2 warning signs in our investment analysis , you should know about…
If you’re interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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