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 HyreCar Inc. (NASDAQ:HYRE) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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 step when considering a company’s debt levels is to consider its cash and debt together.

What Is HyreCar’s Net Debt?

As you can see below, at the end of March 2021, HyreCar had US$2.00m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds US$25.5m in cash, so it actually has US$23.5m net cash.

How Strong Is HyreCar’s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that HyreCar had liabilities of US$9.02m due within 12 months and liabilities of US$109.1k due beyond that. Offsetting these obligations, it had cash of US$25.5m as well as receivables valued at US$132.8k due within 12 months. So it can boast US$16.5m more liquid assets than total liabilities.

This surplus suggests that HyreCar has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, HyreCar boasts net cash, so it’s fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if HyreCar can strengthen its balance sheet over time.

Over 12 months, HyreCar reported revenue of US$27m, which is a gain of 48%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is HyreCar?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year HyreCar had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$12m and booked a US$18m accounting loss. Given it only has net cash of US$23.5m, the company may need to raise more capital if it doesn’t reach break-even soon. HyreCar’s revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There’s no doubt that we learn most about debt from the balance sheet.