Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Newegg Commerce, Inc. (NASDAQ:NEGG) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Newegg Commerce Carry?

The image below, which you can click on for greater detail, shows that at September 2023 Newegg Commerce had debt of US$8.57m, up from US$7.65m in one year. However, it does have US$54.0m in cash offsetting this, leading to net cash of US$45.4m.

How Healthy Is Newegg Commerce's Balance Sheet?

We can see from the most recent balance sheet that Newegg Commerce had liabilities of US$210.4m falling due within a year, and liabilities of US$72.4m due beyond that. Offsetting these obligations, it had cash of US$54.0m as well as receivables valued at US$52.6m due within 12 months. So its liabilities total US$176.1m more than the combination of its cash and short-term receivables.

Newegg Commerce has a market capitalization of US$316.7m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Newegg Commerce boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Newegg Commerce will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Newegg Commerce made a loss at the EBIT level, and saw its revenue drop to US$1.5b, which is a fall of 19%. That's not what we would hope to see.

So How Risky Is Newegg Commerce?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Newegg Commerce lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$43m and booked a US$74m accounting loss. However, it has net cash of US$45.4m, so it has a bit of time before it will need more capital. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. To that end, you should be aware of the 2 warning signs we've spotted with Newegg Commerce .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.