Is ThredUp (NASDAQ:TDUP) Using Debt Sensibly?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We note that ThredUp Inc. (NASDAQ:TDUP) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 ThredUp

What Is ThredUp's Net Debt?

The image below, which you can click on for greater detail, shows that ThredUp had debt of US$24.9m at the end of March 2024, a reduction from US$28.7m over a year. However, its balance sheet shows it holds US$62.5m in cash, so it actually has US$37.6m net cash.

How Healthy Is ThredUp's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ThredUp had liabilities of US$77.1m due within 12 months and liabilities of US$73.7m due beyond that. On the other hand, it had cash of US$62.5m and US$6.93m worth of receivables due within a year. So it has liabilities totalling US$81.3m more than its cash and near-term receivables, combined.

ThredUp has a market capitalization of US$209.5m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, ThredUp 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 it is future earnings, more than anything, that will determine ThredUp's ability to maintain a healthy balance sheet going forward. 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 ThredUp wasn't profitable at an EBIT level, but managed to grow its revenue by 12%, to US$326m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is ThredUp?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months ThredUp lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$29m and booked a US$68m accounting loss. But at least it has US$37.6m 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. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - ThredUp has 2 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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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.

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