Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Freelancer Limited (ASX:FLN) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. 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 step when considering a company’s debt levels is to consider its cash and debt together.
How Much Debt Does Freelancer Carry?
You can click the graphic below for the historical numbers, but it shows that as of December 2018 Freelancer had AU$121.0k of debt, an increase on none, over one year. But it also has AU$33.2m in cash to offset that, meaning it has AU$33.1m net cash.
A Look At Freelancer’s Liabilities
According to the last reported balance sheet, Freelancer had liabilities of AU$38.6m due within 12 months, and liabilities of AU$1.41m due beyond 12 months. Offsetting this, it had AU$33.2m in cash and AU$3.47m in receivables that were due within 12 months. So it has liabilities totalling AU$3.36m more than its cash and near-term receivables, combined.
Having regard to Freelancer’s size, it seems that its liquid assets are well balanced with its total liabilities. So while it’s hard to imagine that the AU$446.6m company is struggling for cash, we still think it’s worth monitoring its balance sheet. Given that Freelancer has more cash than debt, 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 Freelancer’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.
In the last year Freelancer managed to grow its revenue by 3.1%, to AU$52m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is Freelancer?
We have no doubt that loss making companies are, in general, riskier than profitable ones. Anf the fact is that over the last twelve months Freelancer lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through AU$1.1m of cash and made a loss of AU$1.5m. But the saving grace is the AU$33m on the balance sheet. That kitty means the company can keep spending for growth for at least five years, at current rates. Summing up, we’re a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. For riskier companies like Freelancer 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.
At the end of the day, it’s often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It’s free.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.