Howard Marks put it nicely when he said that, rather than worrying about share price volatility, ‘The possibility of permanent loss is the risk I worry about… and every practical investor I know worries about.’ 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 more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Fiverr International Carry?
You can click the graphic below for the historical numbers, but it shows that as of March 2022 Fiverr International had US$452.3m of debt, an increase on US$359.9m, over one year. However, it does have US$346.2m in cash offsetting this, leading to net debt of about US$106.0m.
A Look At Fiverr International’s Liabilities
We can see from the most recent balance sheet that Fiverr International had liabilities of US$218.3m falling due within a year, and liabilities of US$461.7m due beyond that. On the other hand, it had cash of US$346.2m and US$14.5m worth of receivables due within a year. So its liabilities total US$319.2m more than the combination of its cash and short-term receivables.
While this might seem like a lot, it is not so bad since Fiverr International has a market capitalization of US$1.48b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. There’s no doubt that we learn most about debt from the balance sheet. 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 41%, to US$316m. With any luck the company will be able to grow its way to profitability.
Caveat Emptor
While we can certainly appreciate Fiverr International’s revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at US$49m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of US$64m into a profit.