Yahoo Finance Shopify (NYSE:SHOP) Has Debt But No Earnings; Should You Worry?
David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Shopify Inc. (NYSE:SHOP) makes use of debt. But should shareholders be worried about its use of debt?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Shopify
How Much Debt Does Shopify Carry?
The chart below, which you can click on for greater detail, shows that Shopify had US$914.0m in debt in March 2023; about the same as the year before. However, it does have US$4.86b in cash offsetting this, leading to net cash of US$3.95b.
How Healthy Is Shopify's Balance Sheet?
According to the last reported balance sheet, Shopify had liabilities of US$883.0m due within 12 months, and liabilities of US$1.62b due beyond 12 months. On the other hand, it had cash of US$4.86b and US$659.0m worth of receivables due within a year. So it can boast US$3.02b more liquid assets than total liabilities.
This surplus suggests that Shopify has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Shopify boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Shopify can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Shopify wasn't profitable at an EBIT level, but managed to grow its revenue by 22%, to US$5.9b. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Shopify?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Shopify had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$59m of cash and made a loss of US$1.9b. While this does make the company a bit risky, it's important to remember it has net cash of US$3.95b. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, Shopify may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Shopify 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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