Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that ‘Volatility is far from synonymous with risk.’ 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 note that Wix.com Ltd. (NASDAQ:WIX) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Wix.com Carry?

As you can see below, at the end of September 2021, Wix.com had US$921.7m of debt, up from US$824.2m a year ago. Click the image for more detail. But on the other hand it also has US$1.25b in cash, leading to a US$324.0m net cash position.

A Look At Wix.com’s Liabilities

We can see from the most recent balance sheet that Wix.com had liabilities of US$720.4m falling due within a year, and liabilities of US$1.14b due beyond that. Offsetting these obligations, it had cash of US$1.25b as well as receivables valued at US$28.0m due within 12 months. So its liabilities total US$585.8m more than the combination of its cash and short-term receivables.

Of course, Wix.com has a market capitalization of US$9.28b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Wix.com also has more cash than debt, so we’re pretty confident 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 Wix.com’s ability to maintain a healthy balance sheet going forward.

Over 12 months, Wix.com reported revenue of US$1.2b, which is a gain of 34%, 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 Wix.com?

While Wix.com lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$44m. 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 Wix.com is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But we still think it’s somewhat risky. The balance sheet is clearly the area to focus on when you are analysing debt.