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. We can see that Uber Technologies, Inc. (NYSE:UBER) does use debt in its business. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company 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 and debt together.
What Is Uber Technologies's Net Debt?
The image below, which you can click on for greater detail, shows that at March 2022 Uber Technologies had debt of US$9.53b, up from US$7.83b in one year. However, it also had US$4.18b in cash, and so its net debt is US$5.35b.
How Strong Is Uber Technologies' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Uber Technologies had liabilities of US$8.65b due within 12 months and liabilities of US$14.3b due beyond that. On the other hand, it had cash of US$4.18b and US$3.09b worth of receivables due within a year. So its liabilities total US$15.7b more than the combination of its cash and short-term receivables.
This deficit isn't so bad because Uber Technologies is worth a massive US$47.6b, 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. 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 Uber Technologies'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.
Over 12 months, Uber Technologies reported revenue of US$21b, which is a gain of 98%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
Caveat Emptor
Despite the top line growth, Uber Technologies still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$2.8b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$108m of cash over the last year. So suffice it to say we do consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Uber Technologies is showing 1 warning sign in our investment analysis , you should know about...
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.
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