Sezzle (ASX:SZL) May Not Be Profitable But It Seems To Be Managing Its Debt Just Fine, Anyway

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 can see that Sezzle Inc. (ASX:SZL) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

Check out our latest analysis for Sezzle

What Is Sezzle's Net Debt?

As you can see below, Sezzle had US$3.97m of debt at September 2021, down from US$38.1m a year prior. But on the other hand it also has US$44.0m in cash, leading to a US$40.0m net cash position.

How Strong Is Sezzle's Balance Sheet?

According to the last reported balance sheet, Sezzle had liabilities of US$104.9m due within 12 months, and liabilities of US$3.97m due beyond 12 months. On the other hand, it had cash of US$44.0m and US$115.2m worth of receivables due within a year. So it actually has US$50.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Sezzle could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Sezzle boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Sezzle'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 Sezzle wasn't profitable at an EBIT level, but managed to grow its revenue by 145%, to US$104m. So there's no doubt that shareholders are cheering for growth

So How Risky Is Sezzle?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Sezzle had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$55m of cash and made a loss of US$65m. However, it has net cash of US$40.0m, so it has a bit of time before it will need more capital. The good news for shareholders is that Sezzle has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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. To that end, you should learn about the 5 warning signs we've spotted with Sezzle (including 2 which are significant) .

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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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.