Is Eventbrite (NYSE:EB) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. Importantly, Eventbrite, Inc. (NYSE:EB) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 Eventbrite

What Is Eventbrite's Net Debt?

As you can see below, Eventbrite had US$356.6m of debt, at June 2023, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$672.5m in cash, leading to a US$315.9m net cash position.

How Healthy Is Eventbrite's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Eventbrite had liabilities of US$370.1m due within 12 months and liabilities of US$366.4m due beyond that. Offsetting this, it had US$672.5m in cash and US$4.29m in receivables that were due within 12 months. So its liabilities total US$59.7m more than the combination of its cash and short-term receivables.

Of course, Eventbrite has a market capitalization of US$970.8m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Eventbrite also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 Eventbrite'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 Eventbrite wasn't profitable at an EBIT level, but managed to grow its revenue by 26%, to US$296m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Eventbrite?

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 Eventbrite lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$335k of cash and made a loss of US$33m. While this does make the company a bit risky, it's important to remember it has net cash of US$315.9m. That means it could keep spending at its current rate for more than two years. Eventbrite's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Eventbrite , and understanding them should be part of your investment process.

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.