Shutterstock (NYSE:SSTK) Seems To Use Debt Quite Sensibly

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 Shutterstock, Inc. (NYSE:SSTK) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Shutterstock

How Much Debt Does Shutterstock Carry?

As you can see below, at the end of September 2022, Shutterstock had US$50.0m of debt, up from none a year ago. Click the image for more detail. However, it does have US$76.2m in cash offsetting this, leading to net cash of US$26.2m.

How Healthy Is Shutterstock's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shutterstock had liabilities of US$360.1m due within 12 months and liabilities of US$49.5m due beyond that. On the other hand, it had cash of US$76.2m and US$52.7m worth of receivables due within a year. So it has liabilities totalling US$280.6m more than its cash and near-term receivables, combined.

Given Shutterstock has a market capitalization of US$2.59b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Shutterstock boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Shutterstock has seen its EBIT plunge 19% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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 Shutterstock'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Shutterstock may have net cash on the balance sheet, but 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 both its need for, and its capacity to manage debt. Happily for any shareholders, Shutterstock actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although Shutterstock's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$26.2m. The cherry on top was that in converted 118% of that EBIT to free cash flow, bringing in US$98m. So we are not troubled with Shutterstock's debt use. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Shutterstock insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.