NASDAQ:SOHU) does carry debt. But is this debt a concern to shareholders?” data-reactid=”28″>Legendary fund manager Li Lu (who Charlie Munger backed) once said, ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.’ 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. Importantly, Sohu.com Limited (NASDAQ:SOHU) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can’t easily pay it off, either by raising capital or with its own cash flow. 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. 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 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 Sohu.com ” data-reactid=”31″> Check out our latest analysis for Sohu.com
How Much Debt Does Sohu.com Carry?
As you can see below, at the end of June 2020, Sohu.com had US$211.6m of debt, up from US$169.3m a year ago. Click the image for more detail. However, it does have US$1.47b in cash offsetting this, leading to net cash of US$1.26b.
How Healthy Is Sohu.com’s Balance Sheet?
This short term liquidity is a sign that Sohu.com could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Sohu.com has more cash than debt is arguably a good indication that it can manage its debt safely.
this free report on analyst profit forecasts to be interesting.” data-reactid=”53″>It was also good to see that despite losing money on the EBIT line last year, Sohu.com turned things around in the last 12 months, delivering and EBIT of US$37m. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Sohu.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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Sohu.com 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. Happily for any shareholders, Sohu.com actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Summing up
1 warning sign for Sohu.com that you should be aware of before investing here.” data-reactid=”56″>While we empathize with investors who find debt concerning, you should keep in mind that Sohu.com has net cash of US$1.26b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$114m, being 306% of its EBIT. So we don’t think Sohu.com’s use of debt is risky. There’s no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we’ve discovered 1 warning sign for Sohu.com that you should be aware of before investing here.
our list of net cash growth stocks without delay.” data-reactid=”61″>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.
Get in touch with us directly. Alternatively, email [email protected].” data-reactid=”62″>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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