Pinterest, Inc. ( NYSE: PINS ) had a volatile year so far, rising as high as US$90 and falling as low as US$54. It is a company that definitely profited from 2020, with a surge of new users reaching 100 million during the year.
While on the verge of profitability, we can see that Pinterest does use debt in its business. But the real question is whether this debt is making the company risky.
Lockdown Numbers Shining Through
Company added over 100 million monthly active users in 2020, breaking all the previous records. This puts it in 14th place on the global social network rank, not exactly on par with Facebook or TikTok but ahead of Twitter.
The number of total active users reached 478 million, but more importantly, the company successfully grew the international revenue, doubling it up between Q419 and Q420.
Pinterest Monthly User Activity, Source: Pinterest Earnings Report
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price.
If things get terrible, the lenders can take control of the business.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. Pinterest shareholders have been diluted in the past year, with total shares outstanding growing by 8.6%.
By replacing dilution, though, debt can be an excellent tool for businesses that need capital to invest in growth at high rates of return.When we think about a company's use of debt, we first look at cash and debt together.
What Is Pinterest's Net Debt?
The graphic below shows that Pinterest had -US$43.6m of debt in March 2021, down from none one year before.However, it does have US$2.03b in cash, offsetting this, leading to net cash of US$2.08b.
How Strong Is Pinterest's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Pinterest had liabilities of US$209.0m due within 12 months and liabilities of US$154.5m due beyond that. Offsetting these obligations, it had cash of US$2.03b as well as receivables valued at US$389.2m due within 12 months. So it actually has US$2.06b more liquid assets than total liabilities.
It was also good to see that despite losing money on the EBIT line last year, Pinterest turned things around in the last 12 months, delivering an EBIT of US$70m. When analyzing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Pinterest's ability to maintain a healthy balance sheet from now on. So if you're focused on the future, you can check out this free report showing analyst profit forecasts.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Pinterest may have net cash on the balance sheet. However, it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow because that will influence its need and capacity to manage debt. Happily for any shareholders, Pinterest actually produced more free cash flow than EBIT over the last year.
Despite being in the historically cheap financing period, Pinterest hasn't been taking on significant debt. When needed, the company has been diluting the shareholders, relying on issuing new shares instead of loading the debt on the balance sheet. While not the most popular option, it is understandable, given that the company is not yet fully profitable.
While we empathize with investors who find debt concerning, you should keep in mind that Pinterest has net cash of US$2.08b, as well as more liquid assets than liabilities. And it impressed us with a free cash flow of US$230m, being 328% of its EBIT. Overall, Pinterest has a stable base in its balance sheet but needs further work on achieving better average revenue per user to avoid any future share dilution.
So is Pinterest's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Pinterest that you should be aware of.
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.
Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no position in any of the companies mentioned. This article 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.