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.' 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. As with many other companies MercadoLibre, Inc. (NASDAQ:MELI) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
What Is MercadoLibre's Debt?
The image below, which you can click on for greater detail, shows that MercadoLibre had debt of US$4.36b at the end of March 2024, a reduction from US$4.78b over a year. However, it does have US$6.25b in cash offsetting this, leading to net cash of US$1.89b.
A Look At MercadoLibre's Liabilities
According to the last reported balance sheet, MercadoLibre had liabilities of US$12.3b due within 12 months, and liabilities of US$3.42b due beyond 12 months. On the other hand, it had cash of US$6.25b and US$7.25b worth of receivables due within a year. So it has liabilities totalling US$2.17b more than its cash and near-term receivables, combined.
Of course, MercadoLibre has a titanic market capitalization of US$88.7b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, MercadoLibre boasts net cash, so it's fair to say it does not have a heavy debt load!
In addition to that, we're happy to report that MercadoLibre has boosted its EBIT by 73%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if MercadoLibre 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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. MercadoLibre 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, MercadoLibre actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
Summing Up
We could understand if investors are concerned about MercadoLibre's liabilities, but we can be reassured by the fact it has has net cash of US$1.89b. And it impressed us with free cash flow of US$5.2b, being 225% of its EBIT. So is MercadoLibre's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in MercadoLibre, you may well want to click here to check an interactive graph of its earnings per share history.
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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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.