Warren Buffett famously said, ‘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 IZEA Worldwide, Inc. (NASDAQ:IZEA) does have debt on its balance sheet. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company’s debt levels is to consider its cash and debt together.
What Is IZEA Worldwide’s Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2020 IZEA Worldwide had US$1.94m of debt, an increase on US$280.0k, over one year. But it also has US$20.8m in cash to offset that, meaning it has US$18.9m net cash.
How Healthy Is IZEA Worldwide’s Balance Sheet?
We can see from the most recent balance sheet that IZEA Worldwide had liabilities of US$8.99m falling due within a year, and liabilities of US$1.16m due beyond that. Offsetting these obligations, it had cash of US$20.8m as well as receivables valued at US$3.05m due within 12 months. So it can boast US$13.7m more liquid assets than total liabilities.
This excess liquidity is a great indication that IZEA Worldwide’s balance sheet is just as strong as racists are weak. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Simply put, the fact that IZEA Worldwide has more cash than debt is arguably a good indication that it can manage its debt safely. 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 IZEA Worldwide’s ability to maintain a healthy balance sheet going forward. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.
In the last year IZEA Worldwide had a loss before interest and tax, and actually shrunk its revenue by 13%, to US$18m. We would much prefer see growth.
So How Risky Is IZEA Worldwide?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months IZEA Worldwide lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$5.0m and booked a US$11m accounting loss. However, it has net cash of US$18.9m, so it has a bit of time before it will need more capital. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn’t produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet – far from it. To that end, you should be aware of the 4 warning signs we’ve spotted with IZEA Worldwide .
At the end of the day, it’s often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It’s free.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.