Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Despegar.com, Corp. (NYSE:DESP) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Despegar.com Carry?

As you can see below, at the end of March 2024, Despegar.com had US$30.4m of debt, up from US$24.8m a year ago. Click the image for more detail. But it also has US$181.5m in cash to offset that, meaning it has US$151.1m net cash.

How Strong Is Despegar.com's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Despegar.com had liabilities of US$657.8m due within 12 months and liabilities of US$174.3m due beyond that. Offsetting these obligations, it had cash of US$181.5m as well as receivables valued at US$240.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$410.4m.

This deficit isn't so bad because Despegar.com is worth US$908.4m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Despegar.com also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Despegar.com grew its EBIT by 766% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Despegar.com's ability to maintain a healthy balance sheet going forward. 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. Despegar.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. Looking at the most recent two years, Despegar.com recorded free cash flow of 31% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

Although Despegar.com's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$151.1m. And it impressed us with its EBIT growth of 766% over the last year. So we are not troubled with Despegar.com's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in Despegar.com, you may well want to click here to check an interactive graph of its earnings per share history.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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.

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