Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Fiverr International Ltd. (NYSE:FVRR) does use debt in its business. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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.
What Is Fiverr International's Debt?
The image below, which you can click on for greater detail, shows that Fiverr International had debt of US$4.48m at the end of June 2020, a reduction from US$5.79m over a year. However, its balance sheet shows it holds US$201.8m in cash, so it actually has US$197.4m net cash.
How Healthy Is Fiverr International's Balance Sheet?
We can see from the most recent balance sheet that Fiverr International had liabilities of US$117.1m falling due within a year, and liabilities of US$3.97m due beyond that. Offsetting these obligations, it had cash of US$201.8m as well as receivables valued at US$3.57m due within 12 months. So it actually has US$84.4m more liquid assets than total liabilities.
This state of affairs indicates that Fiverr International's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$4.45b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Fiverr International has more cash than debt is arguably a good indication that 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 Fiverr International's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Fiverr International reported revenue of US$139m, which is a gain of 54%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Fiverr International?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Fiverr International lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$2.0m of cash and made a loss of US$22.2m. While this does make the company a bit risky, it's important to remember it has net cash of US$197.4m. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, Fiverr International may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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. To that end, you should be aware of the 2 warning signs we've spotted with Fiverr International .
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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