Does Redfin (NASDAQ: RDFN) have a healthy track record?
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Like many other companies Redfin Company (NASDAQ: RDFN) uses debt. But the real question is whether this debt makes the business risky.
What risk does debt entail?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, debt can be an important tool in businesses, especially capital intensive businesses. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
Check out our latest analysis for Redfin
What is Redfin’s debt?
You can click on the graph below for historical numbers, but it shows that as of June 2021, Redfin had $ 1.41 billion in debt, an increase from $ 170.7 million, year on year. . However, given that it has a cash reserve of US $ 767.0 million, its net debt is less, at approximately US $ 638.2 million.
Is Redfin’s track record healthy?
The latest balance sheet data shows that Redfin had liabilities of US $ 354.1 million due within one year and liabilities of US $ 1.28 billion due thereafter. On the other hand, it had US $ 767.0 million in cash and US $ 84.8 million in receivables due within one year. It therefore has a liability totaling US $ 783.8 million more than its cash and short-term receivables combined.
Of course, Redfin has a market cap of US $ 5.37 billion, so this liability is likely manageable. But there are enough liabilities that we would certainly recommend that shareholders continue to monitor the balance sheet going forward.
We measure a company’s debt load relative to its earning capacity by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT) covers its interest costs (interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
Low interest coverage of 0.24 times and an extremely high net debt to EBITDA ratio of 21.2 hit our confidence in Redfin like a punch in the stomach. The debt burden here is considerable. A buyout factor for Redfin is that it turned last year’s loss of EBIT into a gain of US $ 4.3 million, over the past twelve months. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Redfin can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a business needs free cash flow to repay its debts; accounting profits are not enough. It is therefore worth checking to what extent earnings before interest and taxes (EBIT) are backed by free cash flow. Over the past year, Redfin has recorded substantial total negative free cash flow. While this may be the result of spending on growth, it makes debt much riskier.
Our point of view
To be frank, Redfin’s interest coverage and track record of converting EBIT to free cash flow makes us rather uncomfortable with its debt levels. But at least his total liability level isn’t that bad. Overall, we think it’s fair to say that Redfin has enough debt that there is real risk around the balance sheet. If all goes well, this should increase returns, but on the other hand, the risk of permanent capital loss is increased by debt. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. Note that Redfin displays 2 warning signs in our investment analysis , you must know…
At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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