Is Peloton Interactive (NASDAQ:PTON) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Peloton Interactive, Inc. (NASDAQ:PTON) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Peloton Interactive

What Is Peloton Interactive's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Peloton Interactive had US$1.68b of debt, an increase on US$846.7m, over one year. On the flip side, it has US$871.0m in cash leading to net debt of about US$812.6m.

How Healthy Is Peloton Interactive's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Peloton Interactive had liabilities of US$903.2m due within 12 months and liabilities of US$2.37b due beyond that. Offsetting this, it had US$871.0m in cash and US$125.1m in receivables that were due within 12 months. So it has liabilities totalling US$2.27b more than its cash and near-term receivables, combined.

Peloton Interactive has a market capitalization of US$5.85b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Peloton Interactive 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.

In the last year Peloton Interactive had a loss before interest and tax, and actually shrunk its revenue by 26%, to US$3.1b. That makes us nervous, to say the least.

Caveat Emptor

Not only did Peloton Interactive's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping US$1.2b. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$1.5b of cash over the last year. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Peloton Interactive that you should be aware of.

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.