Avalara (NYSE: AVLR) weighing on its debt?

Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried “. So it can be obvious that you need to consider debt, when you think about how risky a given stock is, because too much debt can sink a business. We can see that Avalara, Inc. (NYSE: AVLR) uses debt in its business. But does this debt worry shareholders?

Why Does Debt Bring Risk?

Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we look at debt levels, we first look at cash and debt levels, together.

See our latest review for Avalara

What is Avalara’s net debt?

The image below, which you can click for more details, shows that in September 2021, Avalara was in debt of $ 960.4 million, up from none in a year. But it also has $ 1.54 billion in cash to make up for that, which means it has $ 576.3 million in net cash.

How strong is Avalara’s balance sheet?

The latest balance sheet data shows that Avalara had liabilities of US $ 539.0 million due within one year, and liabilities of US $ 1.06 billion due after that. In return, he had $ 1.54 billion in cash and $ 96.3 million in receivables due within 12 months. These liquid assets therefore roughly correspond to the total liabilities.

Considering Avalara’s size, it appears that her liquid assets are well balanced with her total liabilities. So while it’s hard to imagine the US $ 12.1 billion company struggling to find cash, we still think it’s worth watching its balance sheet. Put simply, the fact that Avalara has more cash than debt is arguably a good indication that she can safely manage her debt. There is no doubt that we learn the most about debt from the balance sheet. But it’s future profits, more than anything, that will determine Avalara’s ability to maintain a healthy balance sheet going forward. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.

Over 12 months, Avalara reported revenue of US $ 649 million, a gain of 40%, although it reported no profit before interest and taxes. Hopefully the business will be able to move towards profitability.

So how risky is Avalara?

Although Avalara recorded a loss of earnings before interest and taxes (EBIT) over the past twelve months, it generated positive free cash flow of US $ 21 million. So, although it is in deficit, it does not appear to have too much short-term balance sheet risk, given the net cash position. We believe that its 40% revenue growth is a good sign. There is no doubt that rapid growth in sales can cure all kinds of ailments, for one title. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. For example, we have identified 4 warning signs for Avalara (1 is significant) you must be aware.

If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash-flow-growing stocks.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.