Is Purple Innovation (NASDAQ:PRPL) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Purple Innovation, Inc. (NASDAQ:PRPL) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Purple Innovation

What Is Purple Innovation's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Purple Innovation had US$40.1m of debt in March 2022, down from US$44.2m, one year before. However, it does have US$62.7m in cash offsetting this, leading to net cash of US$22.6m.

How Healthy Is Purple Innovation's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Purple Innovation had liabilities of US$111.4m due within 12 months and liabilities of US$303.3m due beyond that. Offsetting these obligations, it had cash of US$62.7m as well as receivables valued at US$29.0m due within 12 months. So its liabilities total US$323.0m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of US$333.8m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, Purple Innovation 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 Purple Innovation'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.

Over 12 months, Purple Innovation made a loss at the EBIT level, and saw its revenue drop to US$683m, which is a fall of 4.1%. We would much prefer see growth.

So How Risky Is Purple Innovation?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Purple Innovation had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$124m of cash and made a loss of US$30m. With only US$22.6m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Purple Innovation that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.