We Think Shutterstock (NYSE:SSTK) Can Manage Its Debt With Ease

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Shutterstock, Inc. (NYSE:SSTK) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Shutterstock

What Is Shutterstock's Net Debt?

The image below, which you can click on for greater detail, shows that Shutterstock had debt of US$30.0m at the end of September 2023, a reduction from US$50.0m over a year. But it also has US$75.2m in cash to offset that, meaning it has US$45.2m net cash.

A Look At Shutterstock's Liabilities

Zooming in on the latest balance sheet data, we can see that Shutterstock had liabilities of US$424.3m due within 12 months and liabilities of US$59.7m due beyond that. On the other hand, it had cash of US$75.2m and US$85.4m worth of receivables due within a year. So it has liabilities totalling US$323.3m more than its cash and near-term receivables, combined.

Shutterstock has a market capitalization of US$1.58b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Shutterstock boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Shutterstock grew its EBIT at 19% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Shutterstock can strengthen its balance sheet over time. 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. While Shutterstock has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Shutterstock generated free cash flow amounting to a very robust 100% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

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$45.2m. And it impressed us with free cash flow of US$106m, being 100% of its EBIT. So we don't think Shutterstock's use of debt is risky. 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. Be aware that Shutterstock is showing 1 warning sign in our investment analysis , you should know about...

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.