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. Importantly, XpresSpa Group, Inc. (NASDAQ:XSPA) does carry debt. But is this debt a concern to shareholders?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.
What Is XpresSpa Group's Debt?
As you can see below, XpresSpa Group had US$3.58m of debt at December 2021, down from US$5.65m a year prior. However, its balance sheet shows it holds US$105.5m in cash, so it actually has US$101.9m net cash.
How Healthy Is XpresSpa Group's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that XpresSpa Group had liabilities of US$19.8m due within 12 months and liabilities of US$7.50m due beyond that. On the other hand, it had cash of US$105.5m and US$615.0k worth of receivables due within a year. So it actually has US$78.8m 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). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that XpresSpa Group has more cash than debt is arguably a good indication that it can manage its debt safely.
It was also good to see that despite losing money on the EBIT line last year, XpresSpa Group turned things around in the last 12 months, delivering and EBIT of US$4.9m. 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 XpresSpa Group'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. XpresSpa Group 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 year, XpresSpa Group actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
While it is always sensible to investigate a company's debt, in this case XpresSpa Group has US$101.9m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 141% of that EBIT to free cash flow, bringing in US$7.0m. So we don't think XpresSpa Group's use of debt is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for XpresSpa Group you should know about.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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.