Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Like many other companies Chegg, Inc. (NYSE: CHGG) uses debt. But the real question is whether this debt makes the business risky.
What risk does debt entail?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can’t meet its legal debt repayment obligations, shareholders could walk away with nothing. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. The first step when considering a company’s debt levels is to consider its cash flow and debt together.
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What is Chegg’s net debt?
The image below, which you can click for more details, shows that as of June 2021, Chegg was in debt of $ 1.68 billion, up from $ 926.2 million in a year. But on the other hand, it also has $ 2.06 billion in cash, which leads to a net cash position of $ 386.4 million.
Is Chegg’s track record healthy?
The latest balance sheet data shows that Chegg had $ 113.5 million in liabilities due within one year, and $ 1.70 billion in liabilities due thereafter. In compensation for these obligations, he had cash of US $ 2.06 billion as well as receivables valued at US $ 10.1 million due within 12 months. He can therefore claim $ 258.7 million more in liquid assets than total Liabilities.
This short-term liquidity is a sign that Chegg could probably pay off his debt easily, as his balance sheet is far from tight. In short, Chegg has clear cash flow, so it’s fair to say that he doesn’t have a lot of debt!
Notably, Chegg’s EBIT was higher than Elon Musk’s, gaining a whopping 124% from last year. The balance sheet is clearly the area you need to focus on when analyzing debt. But it’s future profits, more than anything, that will determine Chegg’s ability to maintain a healthy balance sheet in the future. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. While Chegg has net cash on his balance sheet, it’s still worth looking at his ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast he’s building (or erodes) that cash balance. . Over the past three years, Chegg has actually generated more free cash flow than EBIT. There is nothing better than cash flow to stay in the good graces of your lenders.
In summary
While we sympathize with investors who find debt of concern, you should keep in mind that Chegg has net cash of $ 386.4 million, as well as more liquid assets than liabilities. The icing on the cake is that he converted 226% of that EBIT into free cash flow, bringing in US $ 149 million. So is Chegg’s debt a risk? It does not seem to us. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. These risks can be difficult to spot. Every business has them, and we’ve spotted 2 warning signs for Chegg you should know.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
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