ANGI Homeservices (NASDAQ:ANGI) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, '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 note that ANGI Homeservices Inc. (NASDAQ:ANGI) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for ANGI Homeservices

How Much Debt Does ANGI Homeservices Carry?

The image below, which you can click on for greater detail, shows that ANGI Homeservices had debt of US$106.5m at the end of June 2020, a reduction from US$252.1m over a year. But it also has US$421.0m in cash to offset that, meaning it has US$314.5m net cash.

A Look At ANGI Homeservices's Liabilities

According to the last reported balance sheet, ANGI Homeservices had liabilities of US$255.3m due within 12 months, and liabilities of US$343.1m due beyond 12 months. Offsetting this, it had US$421.0m in cash and US$49.8m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$127.6m.

Since publicly traded ANGI Homeservices shares are worth a total of US$4.86b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, ANGI Homeservices also has more cash than debt, so we're pretty confident it can manage its debt safely.

The modesty of its debt load may become crucial for ANGI Homeservices if management cannot prevent a repeat of the 43% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if ANGI Homeservices can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. ANGI Homeservices may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, ANGI Homeservices actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

We could understand if investors are concerned about ANGI Homeservices's liabilities, but we can be reassured by the fact it has has net cash of US$314.5m. And it impressed us with free cash flow of US$185m, being 189% of its EBIT. So we don't have any problem with ANGI Homeservices's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - ANGI Homeservices has 4 warning signs we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

This article by Simply Wall St is general in nature. 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.

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