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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Blue Apron Holdings, Inc. (NYSE:APRN) does use debt in its business. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Blue Apron Holdings’s Debt?
The image below, which you can click on for greater detail, shows that Blue Apron Holdings had debt of US$31.5m at the end of March 2021, a reduction from US$89.6m over a year. However, it does have US$29.6m in cash offsetting this, leading to net debt of about US$1.98m.
A Look At Blue Apron Holdings’ Liabilities
The latest balance sheet data shows that Blue Apron Holdings had liabilities of US$75.9m due within a year, and liabilities of US$75.2m falling due after that. Offsetting this, it had US$29.6m in cash and US$11.4m in receivables that were due within 12 months. So its liabilities total US$110.1m more than the combination of its cash and short-term receivables.
Given this deficit is actually higher than the company’s market capitalization of US$103.2m, we think shareholders really should watch Blue Apron Holdings’s debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. 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 Blue Apron Holdings’s ability to maintain a healthy balance sheet going forward.
Over 12 months, Blue Apron Holdings reported revenue of US$488m, which is a gain of 18%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.
Over the last twelve months Blue Apron Holdings produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable US$33m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through US$11m in negative free cash flow over the last year. That means it’s on the risky side of things. There’s no doubt that we learn most about debt from the balance sheet.
Leave a Reply