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We Think Euronet Worldwide (NASDAQ:EEFT) Can Manage Its Debt With Ease

Simply Wall St

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Euronet Worldwide, Inc. (NASDAQ:EEFT) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Euronet Worldwide

What Is Euronet Worldwide's Net Debt?

As you can see below, at the end of September 2019, Euronet Worldwide had US$1.09b of debt, up from US$888.6m a year ago. Click the image for more detail. But it also has US$1.73b in cash to offset that, meaning it has US$638.7m net cash.

NasdaqGS:EEFT Historical Debt, November 1st 2019
NasdaqGS:EEFT Historical Debt, November 1st 2019

How Healthy Is Euronet Worldwide's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Euronet Worldwide had liabilities of US$1.45b due within 12 months and liabilities of US$1.42b due beyond that. Offsetting these obligations, it had cash of US$1.73b as well as receivables valued at US$663.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$474.7m.

Given Euronet Worldwide has a market capitalization of US$7.63b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Euronet Worldwide boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Euronet Worldwide grew its EBIT by 24% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Euronet Worldwide'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Euronet Worldwide 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. During the last three years, Euronet Worldwide produced sturdy free cash flow equating to 63% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Euronet Worldwide has US$638.7m in net cash. And we liked the look of last year's 24% year-on-year EBIT growth. So we don't think Euronet Worldwide's use of debt is risky. We'd be very excited to see if Euronet Worldwide insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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.