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David Iben put it well when he said, ‘Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.’ 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. We can see that eXp World Holdings, Inc. (NASDAQ:EXPI) does use debt in its business. But the real question is whether this debt is making the company risky.
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. If things get really bad, 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. 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.
How Much Debt Does eXp World Holdings Carry?
The image below, which you can click on for greater detail, shows that at March 2019 eXp World Holdings had debt of US$2.69m, up from none in one year. However, its balance sheet shows it holds US$20.8m in cash, so it actually has US$18.1m net cash.
A Look At eXp World Holdings’s Liabilities
According to the last reported balance sheet, eXp World Holdings had liabilities of US$37.3m due within 12 months, and liabilities of US$1.93m due beyond 12 months. Offsetting these obligations, it had cash of US$20.8m as well as receivables valued at US$29.7m due within 12 months. So it can boast US$11.2m more liquid assets than total liabilities.
This state of affairs indicates that eXp World Holdings’s balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it’s hard to imagine that the US$652.5m company is struggling for cash, we still think it’s worth monitoring its balance sheet. Given that eXp World Holdings has more cash than debt, we’re pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if eXp World Holdings can strengthen its balance sheet over time. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, eXp World Holdings reported revenue of US$595m, which is a gain of 203%. When it comes to revenue growth, that’s like nailing the game winning 3-pointer!
So How Risky Is eXp World Holdings?
Although eXp World Holdings had negative earnings before interest and tax (EBIT) over the last twelve months, it generated positive free cash flow of US$24m. So taking that on face value, and considering the net cash situation, we don’t think that the stock is too risky in the near term. We think its revenue growth of 203% is a good sign. There’s no doubt fast top line growth can cure all manner of ills, for a stock. For riskier companies like eXp World Holdings I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.