Is Despegar.com (NYSE:DESP) Weighed On By Its Debt Load?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Despegar.com, Corp. (NYSE:DESP) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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 Despegar.com

How Much Debt Does Despegar.com Carry?

You can click the graphic below for the historical numbers, but it shows that Despegar.com had US$15.9m of debt in March 2021, down from US$17.5m, one year before. However, it does have US$309.4m in cash offsetting this, leading to net cash of US$293.5m.

A Look At Despegar.com's Liabilities

The latest balance sheet data shows that Despegar.com had liabilities of US$355.3m due within a year, and liabilities of US$231.8m falling due after that. On the other hand, it had cash of US$309.4m and US$60.5m worth of receivables due within a year. So its liabilities total US$217.3m more than the combination of its cash and short-term receivables.

Despegar.com has a market capitalization of US$816.9m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Despegar.com boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Despegar.com 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 Despegar.com had a loss before interest and tax, and actually shrunk its revenue by 77%, to US$107m. To be frank that doesn't bode well.

So How Risky Is Despegar.com?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Despegar.com lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$68m of cash and made a loss of US$172m. Given it only has net cash of US$293.5m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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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