David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Criteo S.A. (NASDAQ:CRTO) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Criteo Carry?
You can click the graphic below for the historical numbers, but it shows that as of March 2024 Criteo had US$5.02m of debt, an increase on US$4.28m, over one year. However, its balance sheet shows it holds US$278.1m in cash, so it actually has US$273.1m net cash.
How Strong Is Criteo's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Criteo had liabilities of US$995.0m due within 12 months and liabilities of US$138.7m due beyond that. Offsetting these obligations, it had cash of US$278.1m as well as receivables valued at US$763.4m due within 12 months. So it has liabilities totalling US$92.1m more than its cash and near-term receivables, combined.
Given Criteo has a market capitalization of US$2.14b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Criteo also has more cash than debt, so we're pretty confident it can manage its debt safely.
It was also good to see that despite losing money on the EBIT line last year, Criteo turned things around in the last 12 months, delivering and EBIT of US$137m. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Criteo's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Criteo has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Criteo recorded free cash flow worth a fulsome 93% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.
Summing Up
We could understand if investors are concerned about Criteo's liabilities, but we can be reassured by the fact it has has net cash of US$273.1m. And it impressed us with free cash flow of US$128m, being 93% of its EBIT. So is Criteo's debt a risk? It doesn't seem so to us. 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. For example, we've discovered 2 warning signs for Criteo that you should be aware of before investing here.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.