Rock star Growth Puts XpresSpa Group (NASDAQ:XSPA) In A Position To Use Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We can see that XpresSpa Group, Inc. (NASDAQ:XSPA) does use debt in its business. But should shareholders be worried about its use of debt?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for XpresSpa Group

What Is XpresSpa Group's Debt?

As you can see below, XpresSpa Group had US$5.65m of debt, at September 2021, which is about the same as the year before. You can click the chart for greater detail. But it also has US$109.2m in cash to offset that, meaning it has US$103.5m net cash.

How Healthy Is XpresSpa Group's Balance Sheet?

We can see from the most recent balance sheet that XpresSpa Group had liabilities of US$17.2m falling due within a year, and liabilities of US$8.16m due beyond that. On the other hand, it had cash of US$109.2m and US$64.0k worth of receivables due within a year. So it can boast US$83.9m more liquid assets than total liabilities.

This surplus strongly suggests that XpresSpa Group has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that XpresSpa Group has more cash than debt is arguably a good indication that it can manage its debt safely. 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 XpresSpa Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year XpresSpa Group wasn't profitable at an EBIT level, but managed to grow its revenue by 152%, to US$45m. So there's no doubt that shareholders are cheering for growth

So How Risky Is XpresSpa Group?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year XpresSpa Group had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$7.8m of cash and made a loss of US$16m. With only US$103.5m on the balance sheet, it would appear that its going to need to raise capital again soon. The good news for shareholders is that XpresSpa Group has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that XpresSpa Group is showing 2 warning signs in our investment analysis , 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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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.