Does Farfetch (NYSE:FTCH) Have A Healthy Balance Sheet?

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 Farfetch Limited (NYSE:FTCH) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Farfetch

How Much Debt Does Farfetch Carry?

As you can see below, at the end of September 2020, Farfetch had US$469.4m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds US$756.7m in cash, so it actually has US$287.3m net cash.

A Look At Farfetch's Liabilities

The latest balance sheet data shows that Farfetch had liabilities of US$542.5m due within a year, and liabilities of US$1.72b falling due after that. On the other hand, it had cash of US$756.7m and US$233.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.27b.

Since publicly traded Farfetch shares are worth a very impressive total of US$20.2b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Farfetch 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 Farfetch'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 Farfetch wasn't profitable at an EBIT level, but managed to grow its revenue by 81%, to US$1.5b. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Farfetch?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Farfetch had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$162m and booked a US$1.2b accounting loss. However, it has net cash of US$287.3m, so it has a bit of time before it will need more capital. With very solid revenue growth in the last year, Farfetch may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. For instance, we've identified 3 warning signs for Farfetch that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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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