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 Freelance.com SA (EPA:ALFRE) does use debt in its business. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Freelance.com's Debt?
The image below, which you can click on for greater detail, shows that at June 2020 Freelance.com had debt of €21.9m, up from €11.6m in one year. But on the other hand it also has €36.5m in cash, leading to a €14.6m net cash position.
How Healthy Is Freelance.com's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Freelance.com had liabilities of €78.8m due within 12 months and liabilities of €60.0m due beyond that. On the other hand, it had cash of €36.5m and €89.6m worth of receivables due within a year. So it has liabilities totalling €12.7m more than its cash and near-term receivables, combined.
Of course, Freelance.com has a market capitalization of €145.6m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Freelance.com boasts net cash, so it's fair to say it does not have a heavy debt load!
On the other hand, Freelance.com saw its EBIT drop by 9.1% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Freelance.com can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Freelance.com may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Freelance.com reported free cash flow worth 17% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.
We could understand if investors are concerned about Freelance.com's liabilities, but we can be reassured by the fact it has has net cash of €14.6m. So we don't have any problem with Freelance.com's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider risks, for instance. Every company has them, and we've spotted 2 warning signs for Freelance.com you should know about.
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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