Is Petco Health and Wellness Company (NASDAQ:WOOF) Using Debt In A Risky Way?

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. We can see that Petco Health and Wellness Company, Inc. (NASDAQ:WOOF) does use debt in its business. 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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Petco Health and Wellness Company

What Is Petco Health and Wellness Company's Net Debt?

The chart below, which you can click on for greater detail, shows that Petco Health and Wellness Company had US$1.58b in debt in August 2024; about the same as the year before. However, because it has a cash reserve of US$128.3m, its net debt is less, at about US$1.45b.

A Look At Petco Health and Wellness Company's Liabilities

Zooming in on the latest balance sheet data, we can see that Petco Health and Wellness Company had liabilities of US$1.12b due within 12 months and liabilities of US$3.03b due beyond that. On the other hand, it had cash of US$128.3m and US$47.0m worth of receivables due within a year. So its liabilities total US$3.97b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the US$1.42b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Petco Health and Wellness Company would likely require a major re-capitalisation if it had to pay its creditors today. 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 Petco Health and Wellness Company'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 Petco Health and Wellness Company's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Importantly, Petco Health and Wellness Company had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$21m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through US$29m in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Petco Health and Wellness Company is showing 2 warning signs in our investment analysis , and 1 of those shouldn't be ignored...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.