Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Newegg Commerce, Inc. (NASDAQ:NEGG) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Newegg Commerce's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Newegg Commerce had US$8.71m of debt, an increase on US$7.73m, over one year. However, it does have US$102.5m in cash offsetting this, leading to net cash of US$93.8m.

A Look At Newegg Commerce's Liabilities

According to the last reported balance sheet, Newegg Commerce had liabilities of US$296.5m due within 12 months, and liabilities of US$73.1m due beyond 12 months. Offsetting these obligations, it had cash of US$102.5m as well as receivables valued at US$83.6m due within 12 months. So its liabilities total US$183.5m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Newegg Commerce is worth US$397.3m, and thus could probably raise enough capital to shore up 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. While it does have liabilities worth noting, Newegg Commerce also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

In the last year Newegg Commerce had a loss before interest and tax, and actually shrunk its revenue by 13%, to US$1.5b. That's not what we would hope to see.

So How Risky Is Newegg Commerce?

We have no doubt that loss making companies are, in general, riskier than profitable ones. 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$34m and booked a US$59m accounting loss. But the saving grace is the US$93.8m on the balance sheet. That means it could keep spending at its current rate for more than two years. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Newegg Commerce (including 1 which is a bit unpleasant) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.