Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 note that Chegg, Inc. (NYSE:CHGG) does have debt on its balance sheet. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Chegg
What Is Chegg's Debt?
As you can see below, Chegg had US$600.4m of debt at March 2024, down from US$1.19b a year prior. However, it does have US$390.8m in cash offsetting this, leading to net debt of about US$209.6m.
How Healthy Is Chegg's Balance Sheet?
The latest balance sheet data shows that Chegg had liabilities of US$505.2m due within a year, and liabilities of US$264.0m falling due after that. Offsetting these obligations, it had cash of US$390.8m as well as receivables valued at US$24.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$353.7m.
When you consider that this deficiency exceeds the company's US$332.2m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. 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 Chegg can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Chegg had a loss before interest and tax, and actually shrunk its revenue by 6.5%, to US$703m. We would much prefer see growth.
Caveat Emptor
Over the last twelve months Chegg produced an earnings before interest and tax (EBIT) loss. Indeed, it lost US$11m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of US$132m and the profit of US$15m. So one might argue that there's still a chance it can get things on the right track. 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 example, we've discovered 3 warning signs for Chegg that you should be aware of before investing here.
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.
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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.
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About NYSE:CHGG
Chegg
Operates a direct-to-student learning platform that helps learners build essential life and job skills to accelerate their path from learning programs in the United States and internationally.
Undervalued with reasonable growth potential.
