Freelance.com (EPA:ALFRE) Seems To Use Debt Quite Sensibly

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 Freelance.com SA (EPA:ALFRE) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Freelance.com

How Much Debt Does Freelance.com Carry?

As you can see below, at the end of December 2020, Freelance.com had €38.5m of debt, up from €11.5m a year ago. Click the image for more detail. However, it does have €53.3m in cash offsetting this, leading to net cash of €14.8m.

How Strong Is Freelance.com's Balance Sheet?

According to the last reported balance sheet, Freelance.com had liabilities of €119.3m due within 12 months, and liabilities of €39.9m due beyond 12 months. Offsetting these obligations, it had cash of €53.3m as well as receivables valued at €98.8m due within 12 months. So its liabilities total €7.10m more than the combination of its cash and short-term receivables.

Since publicly traded Freelance.com shares are worth a total of €194.4m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Freelance.com also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that Freelance.com grew its EBIT at 14% over the last year, further increasing its ability to manage debt. 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 Freelance.com'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Freelance.com has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Freelance.com reported free cash flow worth 19% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Freelance.com has €14.8m in net cash. On top of that, it increased its EBIT by 14% in the last twelve months. So we are not troubled with Freelance.com's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Freelance.com that you should be aware of before investing here.

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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