Cardlytics (NASDAQ:CDLX) Has Debt But No Earnings; Should You Worry?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Cardlytics, Inc. (NASDAQ:CDLX) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Cardlytics

What Is Cardlytics's Net Debt?

The image below, which you can click on for greater detail, shows that Cardlytics had debt of US$213.2m at the end of September 2024, a reduction from US$257.1m over a year. However, it does have US$67.0m in cash offsetting this, leading to net debt of about US$146.2m.

How Strong Is Cardlytics' Balance Sheet?

We can see from the most recent balance sheet that Cardlytics had liabilities of US$155.9m falling due within a year, and liabilities of US$173.8m due beyond that. Offsetting these obligations, it had cash of US$67.0m as well as receivables valued at US$109.6m due within 12 months. So it has liabilities totalling US$153.2m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the US$101.6m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Cardlytics would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Cardlytics'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 Cardlytics had a loss before interest and tax, and actually shrunk its revenue by 3.0%, to US$293m. That's not what we would hope to see.

Caveat Emptor

Importantly, Cardlytics had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable US$63m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through US$27m in negative free cash flow over the last year. That means it's on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Cardlytics 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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