Is Wix.com (NASDAQ:WIX) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. 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 Wix.com Ltd. (NASDAQ:WIX) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 Wix.com

What Is Wix.com's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2019 Wix.com had US$354.6m of debt, an increase on US$334.0m, over one year. However, its balance sheet shows it holds US$774.7m in cash, so it actually has US$420.1m net cash.

A Look At Wix.com's Liabilities

The latest balance sheet data shows that Wix.com had liabilities of US$420.0m due within a year, and liabilities of US$417.4m falling due after that. Offsetting this, it had US$774.7m in cash and US$16.2m in receivables that were due within 12 months. So its liabilities total US$46.4m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Wix.com'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$7.34b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Wix.com 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 Wix.com'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.

In the last year Wix.com wasn't profitable at an EBIT level, but managed to grow its revenue by 29%, to US$721m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Wix.com?

While Wix.com lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$123m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. The good news for Wix.com shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But we still think it's somewhat risky. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with Wix.com , and understanding them should be part of your investment process.

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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

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