Is Wayfair (NYSE:W) Using Too Much Debt?

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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.’ So it seems the smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess how risky a company is. We note that Wayfair Inc. (NYSE:W) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Wayfair

What Is Wayfair’s Debt?

The image below, which you can click on for greater detail, shows that at March 2019 Wayfair had debt of US$750.2m, up from US$419.8m in one year. But on the other hand it also has US$805.7m in cash, leading to a US$55.5m net cash position.

NYSE:W Historical Debt, July 17th 2019
NYSE:W Historical Debt, July 17th 2019

How Healthy Is Wayfair’s Balance Sheet?

We can see from the most recent balance sheet that Wayfair had liabilities of US$1.23b falling due within a year, and liabilities of US$1.36b due beyond 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$13.7b, so these liabilities are probably manageable. Having said that, it’s clear that we should continue to monitor its balance sheet, lest it change for the worse. Wayfair boasts net cash, so it’s fair to say it does not have a heavy debt load! There’s no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Wayfair’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, Wayfair reported revenue of US$7.3b, which is a gain of 42%. With any luck the company will be able to grow its way to profitability.

So How Risky Is Wayfair?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Wayfair had negative earnings before interest and tax (EBIT), truth be told. And over the same period it saw negative free cash outflow of US$256m and booked a US$597m accounting loss. But the saving grace is the US$806m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Wayfair’s revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. For riskier companies like Wayfair I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.