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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Freshpet, Inc. (NASDAQ:FRPT) does use debt in its business. 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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. 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 Freshpet Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Freshpet had US$393.1m of debt, an increase on none, over one year. However, it also had US$296.9m in cash, and so its net debt is US$96.2m.

How Healthy Is Freshpet's Balance Sheet?

We can see from the most recent balance sheet that Freshpet had liabilities of US$89.2m falling due within a year, and liabilities of US$421.7m due beyond that. Offsetting this, it had US$296.9m in cash and US$56.8m in receivables that were due within 12 months. So it has liabilities totalling US$157.3m more than its cash and near-term receivables, combined.

Given Freshpet has a market capitalization of US$5.53b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Freshpet 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.

In the last year Freshpet wasn't profitable at an EBIT level, but managed to grow its revenue by 29%, to US$767m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Freshpet still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$30m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled US$163m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Freshpet's profit, revenue, and operating cashflow have changed over the last few years.

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.