Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Vroom, Inc. (NASDAQ:VRM) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 Vroom Carry?
The image below, which you can click on for greater detail, shows that at September 2020 Vroom had debt of US$249.0m, up from US$173.8m in one year. However, its balance sheet shows it holds US$1.16b in cash, so it actually has US$912.4m net cash.
How Strong Is Vroom's Balance Sheet?
According to the last reported balance sheet, Vroom had liabilities of US$364.5m due within 12 months, and liabilities of US$12.6m due beyond 12 months. On the other hand, it had cash of US$1.16b and US$33.8m worth of receivables due within a year. So it can boast US$818.1m more liquid assets than total liabilities.
It's good to see that Vroom has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Vroom boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Vroom'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.
Over 12 months, Vroom reported revenue of US$1.3b, which is a gain of 18%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is Vroom?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Vroom lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$225m of cash and made a loss of US$208m. Given it only has net cash of US$912.4m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the 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. To that end, you should be aware of the 1 warning sign we've spotted with Vroom .
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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