Despegar.com (NYSE:DESP) Seems To Use Debt Quite Sensibly

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Despegar.com, Corp. (NYSE:DESP) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Despegar.com

How Much Debt Does Despegar.com Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Despegar.com had debt of US$35.9m, up from US$30.7m in one year. But on the other hand it also has US$176.1m in cash, leading to a US$140.1m net cash position.

How Healthy Is Despegar.com's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Despegar.com had liabilities of US$662.4m due within 12 months and liabilities of US$163.8m due beyond that. Offsetting these obligations, it had cash of US$176.1m as well as receivables valued at US$284.3m due within 12 months. So it has liabilities totalling US$365.8m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Despegar.com is worth US$1.36b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Despegar.com boasts net cash, so it's fair to say it does not have a heavy debt load!

Pleasingly, Despegar.com is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 140% gain in the last twelve months. 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 Despegar.com 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Despegar.com 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. Looking at the most recent two years, Despegar.com recorded free cash flow of 33% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While Despegar.com does have more liabilities than liquid assets, it also has net cash of US$140.1m. And it impressed us with its EBIT growth of 140% over the last year. So we are not troubled with Despegar.com's debt use. 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. For instance, we've identified 1 warning sign for Despegar.com that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.