Is Sportsman's Warehouse Holdings (NASDAQ:SPWH) Using Debt Sensibly?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 note that Sportsman's Warehouse Holdings, Inc. (NASDAQ:SPWH) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.

View our latest analysis for Sportsman's Warehouse Holdings

What Is Sportsman's Warehouse Holdings's Debt?

The image below, which you can click on for greater detail, shows that Sportsman's Warehouse Holdings had debt of US$170.0m at the end of November 2024, a reduction from US$200.5m over a year. Net debt is about the same, since the it doesn't have much cash.

A Look At Sportsman's Warehouse Holdings' Liabilities

According to the last reported balance sheet, Sportsman's Warehouse Holdings had liabilities of US$386.7m due within 12 months, and liabilities of US$337.4m due beyond 12 months. Offsetting these obligations, it had cash of US$2.67m as well as receivables valued at US$1.97m due within 12 months. So its liabilities total US$719.5m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the US$74.0m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Sportsman's Warehouse Holdings would probably need a major re-capitalization if its creditors were to demand repayment. 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 Sportsman's Warehouse 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.

In the last year Sportsman's Warehouse Holdings had a loss before interest and tax, and actually shrunk its revenue by 5.3%, to US$1.2b. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Sportsman's Warehouse Holdings produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping US$26m. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost US$33m in the last year. So we think buying this stock 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. For example, we've discovered 3 warning signs for Sportsman's Warehouse Holdings that you should be aware of before investing here.

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.