David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Chegg, Inc. (NYSE:CHGG) makes use of debt. But is this debt a concern to shareholders?
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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.
See our latest analysis for Chegg
How Much Debt Does Chegg Carry?
As you can see below, Chegg had US$767.0m of debt at June 2023, down from US$1.68b a year prior. However, because it has a cash reserve of US$385.1m, its net debt is less, at about US$382.0m.
How Healthy Is Chegg's Balance Sheet?
We can see from the most recent balance sheet that Chegg had liabilities of US$142.8m falling due within a year, and liabilities of US$790.7m due beyond that. On the other hand, it had cash of US$385.1m and US$20.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$527.8m.
This deficit isn't so bad because Chegg is worth US$1.02b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Chegg can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Chegg made a loss at the EBIT level, and saw its revenue drop to US$740m, which is a fall of 4.6%. We would much prefer see growth.
Caveat Emptor
Over the last twelve months Chegg produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$12m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of US$168m and the profit of US$280m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. 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. Be aware that Chegg is showing 2 warning signs in our investment analysis , and 1 of those is potentially serious...
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.