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

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 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?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Despegar.com

What Is Despegar.com's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2022 Despegar.com had debt of US$50.9m, up from US$41.0m in one year. However, it does have US$219.2m in cash offsetting this, leading to net cash of US$168.2m.

A Look At Despegar.com's Liabilities

According to the last reported balance sheet, Despegar.com had liabilities of US$564.5m due within 12 months, and liabilities of US$198.7m due beyond 12 months. Offsetting these obligations, it had cash of US$219.2m as well as receivables valued at US$200.1m due within 12 months. So it has liabilities totalling US$343.9m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of US$370.6m, so it does suggest shareholders should keep an eye on Despegar.com's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Despegar.com boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Despegar.com'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 Despegar.com wasn't profitable at an EBIT level, but managed to grow its revenue by 67%, to US$538m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Despegar.com?

Although Despegar.com had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$6.0m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. The good news for Despegar.com shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But we still think it's somewhat risky. For riskier companies like Despegar.com I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.