Here's Why eXp World Holdings (NASDAQ:EXPI) Can Manage Its Debt Responsibly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, eXp World Holdings, Inc. (NASDAQ:EXPI) does carry debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Our analysis indicates that EXPI is potentially undervalued!

What Is eXp World Holdings's Net Debt?

As you can see below, eXp World Holdings had US$2.71m of debt, at September 2022, which is about the same as the year before. You can click the chart for greater detail. But it also has US$134.5m in cash to offset that, meaning it has US$131.8m net cash.

A Look At eXp World Holdings' Liabilities

The latest balance sheet data shows that eXp World Holdings had liabilities of US$180.4m due within a year, and liabilities of US$3.43m falling due after that. Offsetting these obligations, it had cash of US$134.5m as well as receivables valued at US$119.8m due within 12 months. So it can boast US$70.6m more liquid assets than total liabilities.

This surplus suggests that eXp World Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that eXp World Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that eXp World Holdings's load is not too heavy, because its EBIT was down 56% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if eXp World Holdings 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. eXp World Holdings 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, eXp World Holdings actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case eXp World Holdings has US$131.8m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$222m, being 649% of its EBIT. So we don't have any problem with eXp World Holdings's use of debt. 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. Case in point: We've spotted 3 warning signs for eXp World Holdings 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.

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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.