Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Despegar.com, Corp. (NYSE:DESP) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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.

How Much Debt Does Despegar.com Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Despegar.com had US$35.9m of debt, an increase on US$30.7m, over one year. However, its balance sheet shows it holds US$176.1m in cash, so it actually has US$140.1m net cash.

How Healthy Is Despegar.com's Balance Sheet?

The latest balance sheet data shows that Despegar.com had liabilities of US$662.4m due within a year, and liabilities of US$163.8m falling due after that. Offsetting these obligations, it had cash of US$176.1m as well as receivables valued at US$284.3m due within 12 months. So it has liabilities totalling US$365.8m more than its cash and near-term receivables, combined.

Despegar.com has a market capitalization of US$1.39b, so it could very likely raise cash to ameliorate 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. Despite its noteworthy liabilities, Despegar.com boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, Despegar.com's EBIT launched higher than Elon Musk, gaining a whopping 140% on last year. The balance sheet is clearly the area to focus on when you are analysing debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Despegar.com has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last two years, Despegar.com's free cash flow amounted to 33% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

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$140.1m. And we liked the look of last year's 140% year-on-year EBIT growth. So we are not troubled with Despegar.com's debt use. 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. We've identified 1 warning sign with Despegar.com , and understanding them should be part of your investment process.

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.

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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.