Does Despegar.com (NYSE:DESP) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We can see that Despegar.com, Corp. (NYSE:DESP) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.

Check out our latest analysis for Despegar.com

How Much Debt Does Despegar.com Carry?

As you can see below, at the end of September 2021, Despegar.com had US$16.5m of debt, up from US$7.22m a year ago. Click the image for more detail. However, it does have US$263.2m in cash offsetting this, leading to net cash of US$246.7m.

How Strong Is Despegar.com's Balance Sheet?

According to the last reported balance sheet, Despegar.com had liabilities of US$403.1m due within 12 months, and liabilities of US$222.5m due beyond 12 months. On the other hand, it had cash of US$263.2m and US$103.4m worth of receivables due within a year. So its liabilities total US$258.9m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Despegar.com is worth US$710.8m, 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. While it does have liabilities worth noting, Despegar.com also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Despegar.com'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.

In the last year Despegar.com wasn't profitable at an EBIT level, but managed to grow its revenue by 12%, to US$252m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Despegar.com?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Despegar.com had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$98m of cash and made a loss of US$127m. Given it only has net cash of US$246.7m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Despegar.com's profit, revenue, and operating cashflow have changed over the last few years.

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.