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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Shopify Inc. (NYSE:SHOP) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.
Check out our latest analysis for Shopify
How Much Debt Does Shopify Carry?
As you can see below, Shopify had US$914.0m of debt, at June 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$4.78b in cash offsetting this, leading to net cash of US$3.87b.
A Look At Shopify's Liabilities
Zooming in on the latest balance sheet data, we can see that Shopify had liabilities of US$880.0m due within 12 months and liabilities of US$1.36b due beyond that. Offsetting this, it had US$4.78b in cash and US$809.0m in receivables that were due within 12 months. So it can boast US$3.35b more liquid assets than total liabilities.
This short term liquidity is a sign that Shopify could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Shopify 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 Shopify's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Shopify wasn't profitable at an EBIT level, but managed to grow its revenue by 26%, to US$6.3b. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Shopify?
While Shopify lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$125m. 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 26% is a good sign. There's no doubt fast top line growth can cure all manner of ills, for a stock. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Shopify insider transactions.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.