Is Avalara (NYSE:AVLR) Weighed On By Its Debt Load?

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 Avalara, Inc. (NYSE:AVLR) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Avalara

What Is Avalara's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2021 Avalara had debt of US$960.4m, up from none in one year. But it also has US$1.54b in cash to offset that, meaning it has US$576.3m net cash.

How Strong Is Avalara's Balance Sheet?

The latest balance sheet data shows that Avalara had liabilities of US$539.0m due within a year, and liabilities of US$1.06b falling due after that. Offsetting this, it had US$1.54b in cash and US$96.3m in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to Avalara's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$12.1b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Avalara 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 Avalara'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, Avalara reported revenue of US$649m, which is a gain of 40%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Avalara?

Although Avalara had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$21m. 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. We think its revenue growth of 40% is a good sign. There's no doubt fast top line growth can cure all manner of ills, for a stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Avalara (1 is significant) you should be aware of.

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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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.