Is Freshpet (NASDAQ:FRPT) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Freshpet, Inc. (NASDAQ:FRPT) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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 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 Freshpet

How Much Debt Does Freshpet Carry?

As you can see below, at the end of June 2022, Freshpet had US$75.5m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds US$327.2m in cash, so it actually has US$251.7m net cash.

A Look At Freshpet's Liabilities

The latest balance sheet data shows that Freshpet had liabilities of US$70.8m due within a year, and liabilities of US$70.0m falling due after that. Offsetting these obligations, it had cash of US$327.2m as well as receivables valued at US$62.1m due within 12 months. So it actually has US$248.4m more liquid assets than total liabilities.

This surplus suggests that Freshpet has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Freshpet 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 it is future earnings, more than anything, that will determine Freshpet'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 Freshpet wasn't profitable at an EBIT level, but managed to grow its revenue by 35%, to US$502m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Freshpet?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Freshpet had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$364m of cash and made a loss of US$49m. But at least it has US$251.7m on the balance sheet to spend on growth, near-term. With very solid revenue growth in the last year, Freshpet may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Freshpet .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.