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. As with many other companies Fiverr International Ltd. (NYSE:FVRR) makes use of debt. But the real question is whether this debt is making the company risky.
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. 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 step when considering a company’s debt levels is to consider its cash and debt together.
How Much Debt Does Fiverr International Carry?
The image below, which you can click on for greater detail, shows that at September 2021 Fiverr International had debt of US$369.7m, up from US$4.67m in one year. But it also has US$426.8m in cash to offset that, meaning it has US$57.1m net cash.
A Look At Fiverr International’s Liabilities
The latest balance sheet data shows that Fiverr International had liabilities of US$180.1m due within a year, and liabilities of US$378.8m falling due after 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$4.06b, it’s hard to believe these liabilities pose much threat. Having said that, it’s clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Fiverr International also has more cash than debt, so we’re pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Fiverr International can strengthen its balance sheet over time.
In the last year Fiverr International wasn’t profitable at an EBIT level, but managed to grow its revenue by 68%, to US$274m. With any luck the company will be able to grow its way to profitability.
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. The good news for Fiverr International shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But we still think it’s somewhat risky. When analysing debt levels, the balance sheet is the obvious place to start.