Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss. of capital “. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Like many other companies Despegar.com, Corp. (NYSE: DESP) uses debt. But should shareholders be concerned about its use of debt?
When is Debt a Problem?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. The first step in examining a business’s debt levels is to consider its cash flow and debt together.
What is the net debt of Despegar.com?
You can click on the graph below for the historical figures, but it shows that as of September 2021, Despegar.com had a debt of US $ 16.5 million, an increase from $ 7.22 million. US, over one year. But it also has $ 263.2 million in cash to make up for that, which means it has $ 246.7 million in net cash.
NYSE: DESP History of Debt to Equity December 10, 2021
How strong is Despegar.com’s balance sheet?
Zooming in on the latest balance sheet data, we can see that Despegar.com had liabilities of US $ 403.1 million due within 12 months and US $ 222.5 million liabilities beyond. In compensation for these obligations, he had cash of US $ 263.2 million as well as receivables valued at US $ 103.4 million maturing within 12 months. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by $ 258.9 million.
While that might sound like a lot, it’s not that bad since Despegar.com has a market cap of $ 624.2 million, so it could likely strengthen its balance sheet by raising capital if it had to. However, it is always worth taking a close look at your ability to repay your debt. Despite its notable liabilities, Despegar.com has a net cash flow, so it’s fair to say it doesn’t have a heavy debt load! The balance sheet is clearly the area to focus on when analyzing debt. But it is future profits, more than anything, that will determine Despegar.com’s ability to maintain a healthy balance sheet going forward. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Year over 12 months, Despegar.com reported revenue of US $ 252 million, a gain of 12%, although it reported no profit before interest and taxes. We usually like to see unprofitable businesses growing faster, but each in their own way.
So how risky is Despegar.com?
By their very nature, businesses that lose money are riskier than those with a long history of profitability. And we note that Despegar.com has recorded a loss of earnings before interest and taxes (EBIT) over the past year. And during the same period, it recorded a negative free cash outflow of US $ 98 million and a book loss of US $ 127 million. Given that it only has $ 246.7 million in net cash, the company may need to raise more capital if it doesn’t break even soon. In summary, we’re a little skeptical on this one, as it looks quite risky in the absence of free cash flow. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. We have identified 1 warning sign with Despegar.com and understanding them should be part of your investment process.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
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