Is GoPro (NASDAQ:GPRO) Using Debt Sensibly?

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 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 GoPro, Inc. (NASDAQ:GPRO) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company’s use of debt, we first look at cash and debt together.

See our latest analysis for GoPro

What Is GoPro’s Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 GoPro had debt of US$218.2m, up from US$148.8m in one year. However, its balance sheet shows it holds US$325.7m in cash, so it actually has US$107.5m net cash.

A Look At GoPro’s Liabilities

The latest balance sheet data shows that GoPro had liabilities of US$262.7m due within a year, and liabilities of US$292.7m falling due after that. On the other hand, it had cash of US$325.7m and US$107.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$122.5m.

Given GoPro has a market capitalization of US$1.88b, it’s hard to believe these liabilities pose much threat. Having said that, it’s clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, GoPro 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 ultimately the future profitability of the business will decide if GoPro can strengthen its balance sheet over time. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, GoPro made a loss at the EBIT level, and saw its revenue drop to US$892m, which is a fall of 25%. To be frank that doesn’t bode well.

So How Risky Is GoPro?

While GoPro lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$88m. So taking that on face value, and considering the net cash situation, we don’t think that the stock is too risky in the near term. With revenue growth uninspiring, we’d really need to see some positive EBIT before mustering much enthusiasm for this business. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet – far from it. Be aware that GoPro is showing 3 warning signs in our investment analysis , you should know about…

When all is said and done, sometimes its easier to focus on companies that don’t even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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