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Is CarParts.com (NASDAQ:PRTS) Using Debt In A Risky Way?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that CarParts.com, Inc. (NASDAQ:PRTS) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for CarParts.com

What Is CarParts.com's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of April 2022 CarParts.com had US$5.00m of debt, an increase on none, over one year. However, it does have US$25.0m in cash offsetting this, leading to net cash of US$20.0m.

debt-equity-history-analysis
debt-equity-history-analysis

How Strong Is CarParts.com's Balance Sheet?

We can see from the most recent balance sheet that CarParts.com had liabilities of US$120.6m falling due within a year, and liabilities of US$43.3m due beyond that. Offsetting this, it had US$25.0m in cash and US$6.46m in receivables that were due within 12 months. So it has liabilities totalling US$132.4m more than its cash and near-term receivables, combined.

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While this might seem like a lot, it is not so bad since CarParts.com has a market capitalization of US$399.7m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, CarParts.com boasts net cash, so it's fair to say it does not have a heavy debt load! 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 CarParts.com'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.

In the last year CarParts.com wasn't profitable at an EBIT level, but managed to grow its revenue by 21%, to US$604m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is CarParts.com?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year CarParts.com had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$27m of cash and made a loss of US$5.5m. With only US$20.0m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, CarParts.com may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for CarParts.com you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.