Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies The RealReal, Inc. (NASDAQ:REAL) makes use of debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.
What Is RealReal's Debt?
The image below, which you can click on for greater detail, shows that at December 2020 RealReal had debt of US$149.2m, up from none in one year. However, its balance sheet shows it holds US$354.9m in cash, so it actually has US$205.7m net cash.
How Healthy Is RealReal's Balance Sheet?
According to the last reported balance sheet, RealReal had liabilities of US$148.3m due within 12 months, and liabilities of US$265.6m due beyond 12 months. Offsetting these obligations, it had cash of US$354.9m as well as receivables valued at US$7.21m due within 12 months. So its liabilities total US$51.7m more than the combination of its cash and short-term receivables.
Of course, RealReal has a market capitalization of US$2.04b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, RealReal also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 RealReal 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.
Over 12 months, RealReal made a loss at the EBIT level, and saw its revenue drop to US$300m, which is a fall of 5.2%. That's not what we would hope to see.
So How Risky Is RealReal?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year RealReal had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$161m of cash and made a loss of US$176m. But at least it has US$205.7m on the balance sheet to spend on growth, near-term. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. For example - RealReal has 4 warning signs we think you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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