These 4 measurements indicate that Peloton Interactive (NASDAQ: PTON) is using its debt safely

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Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. ” So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Like many other companies Interactive Platoon, Inc. (NASDAQ: PTON) uses debt. But the most important question is: what risk does this debt create?

When is debt a problem?

Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, many companies use debt to finance their growth without negative consequences. When we look at debt levels, we first consider both liquidity and debt levels.

Discover our latest analysis for Peloton Interactive

What is Peloton Interactive’s debt?

As you can see below, at the end of March 2021, Peloton Interactive was in debt of $ 821.5 million, down from zero a year ago. Click on the image for more details. But it also has $ 2.69 billion in cash to make up for that, which means it has $ 1.86 billion in net cash.

NasdaqGS: PTON History of debt to equity August 3, 2021

How strong is Peloton Interactive’s balance sheet?

The latest balance sheet data shows Peloton Interactive had $ 1.28 billion in liabilities due within one year, and $ 1.44 billion in liabilities due thereafter. In compensation for these obligations, he had cash of US $ 2.69 billion as well as receivables valued at US $ 30.3 million due within 12 months. These liquid assets therefore correspond roughly to the total liabilities.

Considering the size of Peloton Interactive, it seems its cash flow is well balanced with its total liabilities. So the $ 36.0 billion company is highly unlikely to be cash-strapped, but it’s still worth keeping an eye on the balance sheet. Despite its notable liabilities, Peloton Interactive has a net cash flow, so it’s fair to say it doesn’t have a heavy debt load!

Although Peloton Interactive recorded a loss in EBIT, last year it was also good to see that it generated $ 224 million in EBIT in the last twelve months. There is no doubt that we learn the most about debt from the balance sheet. But it is future profits, more than anything, that will determine Peloton Interactive’s ability to maintain a healthy balance sheet going forward. So if you are focused on the future you can check out this free report showing analysts’ earnings forecasts.

Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. Peloton Interactive may have net cash on the balance sheet, but it’s always interesting to see the extent to which the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and capacity. to manage debt. Fortunately for all shareholders, Peloton Interactive has actually generated more free cash flow than EBIT over the past year. This kind of strong cash generation warms our hearts like a puppy in a bumblebee costume.

In summary

We could understand if investors are concerned about Peloton Interactive’s liabilities, but we can take comfort in the fact that it has net cash of $ 1.86 billion. And it impressed us with free cash flow of US $ 467 million, or 209% of its EBIT. So, is Peloton Interactive’s debt a risk? It does not seem to us. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we discovered 3 warning signs for Peloton Interactive which you should know before investing here.

If you are interested in investing in companies that can generate profits without the burden of debt, check out this page free list of growing companies that have net cash on the balance sheet.

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