Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ 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. As with many other companies Avalara, Inc. (NYSE:AVLR) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company’s use of debt, we first look at cash and debt together.

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. However, its balance sheet shows it holds US$1.54b in cash, so it actually has US$576.3m net cash.

A Look At Avalara’s Liabilities

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. On the other hand, it had cash of US$1.54b and US$96.3m worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that Avalara’s balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it’s hard to imagine that the US$11.2b 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.

In the last year Avalara wasn’t profitable at an EBIT level, but managed to grow its revenue by 40%, to US$649m. 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. We’d see further strong growth as an optimistic indication.