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.' 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. We note that Criteo S.A. (NASDAQ:CRTO) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 Criteo Carry?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Criteo had US$4.08m of debt, an increase on US$2.81m, over one year. However, it does have US$422.1m in cash offsetting this, leading to net cash of US$418.0m.
How Strong Is Criteo's Balance Sheet?
We can see from the most recent balance sheet that Criteo had liabilities of US$553.6m falling due within a year, and liabilities of US$171.0m due beyond that. Offsetting these obligations, it had cash of US$422.1m as well as receivables valued at US$452.7m due within 12 months. So it can boast US$150.1m more liquid assets than total liabilities.
This surplus suggests that Criteo has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Criteo has more cash than debt is arguably a good indication that it can manage its debt safely.
On the other hand, Criteo's EBIT dived 13%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Criteo 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 three years, Criteo recorded free cash flow worth a fulsome 97% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.
While it is always sensible to investigate a company's debt, in this case Criteo has US$418m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$123m, being 97% of its EBIT. So is Criteo's debt a risk? It doesn't seem so to us. We'd be motivated to research the stock further if we found out that Criteo insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.
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.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.