Health Check: How Prudently Does Offerpad Solutions (NYSE:OPAD) Use Debt?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Offerpad Solutions Inc. (NYSE:OPAD) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Offerpad Solutions

How Much Debt Does Offerpad Solutions Carry?

As you can see below, Offerpad Solutions had US$257.2m of debt at December 2023, down from US$666.1m a year prior. On the flip side, it has US$76.0m in cash leading to net debt of about US$181.3m.

How Strong Is Offerpad Solutions' Balance Sheet?

According to the last reported balance sheet, Offerpad Solutions had liabilities of US$276.0m due within 12 months, and liabilities of US$1.89m due beyond 12 months. Offsetting this, it had US$76.0m in cash and US$9.94m in receivables that were due within 12 months. So it has liabilities totalling US$192.0m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of US$200.5m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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 Offerpad Solutions's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Offerpad Solutions made a loss at the EBIT level, and saw its revenue drop to US$1.3b, which is a fall of 67%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Offerpad Solutions's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping US$104m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of US$117m. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Offerpad Solutions .

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.