Is Similarweb (NYSE:SMWB) 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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Similarweb Ltd. (NYSE:SMWB) 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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Similarweb

What Is Similarweb's Net Debt?

The chart below, which you can click on for greater detail, shows that Similarweb had US$25.0m in debt in December 2023; about the same as the year before. But on the other hand it also has US$71.7m in cash, leading to a US$46.7m net cash position.

A Look At Similarweb's Liabilities

The latest balance sheet data shows that Similarweb had liabilities of US$184.2m due within a year, and liabilities of US$39.3m falling due after that. Offsetting these obligations, it had cash of US$71.7m as well as receivables valued at US$49.3m due within 12 months. So it has liabilities totalling US$102.4m more than its cash and near-term receivables, combined.

Since publicly traded Similarweb shares are worth a total of US$626.6m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Similarweb 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 Similarweb'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, Similarweb reported revenue of US$218m, which is a gain of 13%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Similarweb?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Similarweb had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$5.4m of cash and made a loss of US$29m. While this does make the company a bit risky, it's important to remember it has net cash of US$46.7m. That kitty means the company can keep spending for growth for at least two years, at current rates. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. We've identified 1 warning sign with Similarweb , and understanding them should be part of your investment process.

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. 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.