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 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 Travelzoo (NASDAQ:TZOO) does use debt in its business. But the more important question is: how much risk is that debt creating?
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. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. 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. 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 step when considering a company’s debt levels is to consider its cash and debt together.
How Much Debt Does Travelzoo Carry?
The image below, which you can click on for greater detail, shows that at June 2020 Travelzoo had debt of US$5.36m, up from none in one year. But it also has US$25.7m in cash to offset that, meaning it has US$20.3m net cash.
How Strong Is Travelzoo’s Balance Sheet?
According to the last reported balance sheet, Travelzoo had liabilities of US$46.3m due within 12 months, and liabilities of US$17.2m due beyond 12 months. Offsetting this, it had US$25.7m in cash and US$4.03m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$33.8m.
This deficit isn’t so bad because Travelzoo is worth US$90.4m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Travelzoo also has more cash than debt, so we’re pretty confident it can manage its debt safely. 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 Travelzoo’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.
Over 12 months, Travelzoo made a loss at the EBIT level, and saw its revenue drop to US$83m, which is a fall of 23%. That makes us nervous, to say the least.
So How Risky Is Travelzoo?
While Travelzoo lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$23m. So taking that on face value, and considering the net cash situation, we don’t think that the stock is too risky in the near term. With revenue growth uninspiring, we’d really need to see some positive EBIT before mustering much enthusiasm for this business. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet – far from it. Be aware that Travelzoo is showing 3 warning signs in our investment analysis , you should know about…
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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