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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Euronet Worldwide, Inc. (NASDAQ:EEFT) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Euronet Worldwide Carry?
The chart below, which you can click on for greater detail, shows that Euronet Worldwide had US$1.10b in debt in June 2020; about the same as the year before. However, it does have US$1.28b in cash offsetting this, leading to net cash of US$173.8m.
How Healthy Is Euronet Worldwide's Balance Sheet?
We can see from the most recent balance sheet that Euronet Worldwide had liabilities of US$1.44b falling due within a year, and liabilities of US$1.31b due beyond that. Offsetting these obligations, it had cash of US$1.28b as well as receivables valued at US$114.8m due within 12 months. So its liabilities total US$1.36b more than the combination of its cash and short-term receivables.
Euronet Worldwide has a market capitalization of US$4.87b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Euronet Worldwide also has more cash than debt, so we're pretty confident it can manage its debt safely.
But the bad news is that Euronet Worldwide has seen its EBIT plunge 17% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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 Euronet Worldwide can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Euronet Worldwide 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. During the last three years, Euronet Worldwide generated free cash flow amounting to a very robust 87% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.
While Euronet Worldwide does have more liabilities than liquid assets, it also has net cash of US$173.8m. The cherry on top was that in converted 87% of that EBIT to free cash flow, bringing in US$517m. So we are not troubled with Euronet Worldwide's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Euronet Worldwide is showing 3 warning signs in our investment analysis , you should know about...
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
This article by Simply Wall St is general in nature. 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.
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