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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that World Fuel Services Corporation (NYSE:INT) does use debt in its business. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is World Fuel Services's Net Debt?
As you can see below, World Fuel Services had US$493.9m of debt, at September 2021, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$796.0m in cash, leading to a US$302.1m net cash position.
A Look At World Fuel Services' Liabilities
Zooming in on the latest balance sheet data, we can see that World Fuel Services had liabilities of US$2.70b due within 12 months and liabilities of US$924.0m due beyond that. On the other hand, it had cash of US$796.0m and US$2.03b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$792.0m.
While this might seem like a lot, it is not so bad since World Fuel Services has a market capitalization of US$1.73b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, World Fuel Services also has more cash than debt, so we're pretty confident it can manage its debt safely.
Importantly, World Fuel Services's EBIT fell a jaw-dropping 33% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. 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 World Fuel Services's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While World Fuel Services 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 three years, World Fuel Services actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
Although World Fuel Services's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$302.1m. And it impressed us with free cash flow of US$303m, being 144% of its EBIT. So we are not troubled with World Fuel Services's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with World Fuel Services .
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.
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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.