The external fund manager backed by Berkshire Hathaway’s Charlie Munger, Li Lu, makes no bones about it when he says ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that Fiverr International Ltd. (NYSE:FVRR) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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.

What Is Fiverr International’s Debt?

As you can see below, at the end of September 2021, Fiverr International had US$369.7m of debt, up from US$4.67m a year ago. Click the image for more detail. However, it does have US$426.8m in cash offsetting this, leading to net cash of US$57.1m.

A Look At Fiverr International’s Liabilities

We can see from the most recent balance sheet that Fiverr International had liabilities of US$180.1m falling due within a year, and liabilities of US$378.8m due beyond that. Offsetting this, it had US$426.8m in cash and US$8.61m in receivables that were due within 12 months. So its liabilities total US$123.4m more than the combination of its cash and short-term receivables.

Given Fiverr International has a market capitalization of US$2.87b, it’s hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Fiverr International 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 Fiverr International’s ability to maintain a healthy balance sheet going forward.

In the last year Fiverr International wasn’t profitable at an EBIT level, but managed to grow its revenue by 68%, to US$274m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Fiverr International?

Although Fiverr International had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$32m. 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. One positive is that Fiverr International is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be.