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Overstock.com (NASDAQ:OSTK) Has A Rock Solid Balance Sheet

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·4-min read
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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 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 Overstock.com, Inc. (NASDAQ:OSTK) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Overstock.com

How Much Debt Does Overstock.com Carry?

The image below, which you can click on for greater detail, shows that Overstock.com had debt of US$42.1m at the end of September 2021, a reduction from US$45.3m over a year. But on the other hand it also has US$512.2m in cash, leading to a US$470.1m net cash position.

debt-equity-history-analysis
debt-equity-history-analysis

How Healthy Is Overstock.com's Balance Sheet?

We can see from the most recent balance sheet that Overstock.com had liabilities of US$302.5m falling due within a year, and liabilities of US$53.3m due beyond that. Offsetting these obligations, it had cash of US$512.2m as well as receivables valued at US$25.2m due within 12 months. So it actually has US$181.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Overstock.com could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Overstock.com has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Overstock.com grew its EBIT by 128% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Overstock.com can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Overstock.com may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Overstock.com actually produced more free cash flow than EBIT over the last two years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case Overstock.com has US$470.1m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$64m, being 245% of its EBIT. So we don't think Overstock.com's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Overstock.com you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 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.

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