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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, MercadoLibre, Inc. (NASDAQ:MELI) does carry debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is MercadoLibre's Net Debt?
The image below, which you can click on for greater detail, shows that at June 2019 MercadoLibre had debt of US$782.7m, up from US$480.0m in one year. However, its balance sheet shows it holds US$2.57b in cash, so it actually has US$1.79b net cash.
How Healthy Is MercadoLibre's Balance Sheet?
The latest balance sheet data shows that MercadoLibre had liabilities of US$1.45b due within a year, and liabilities of US$901.4m falling due after that. Offsetting these obligations, it had cash of US$2.57b as well as receivables valued at US$666.1m due within 12 months. So it can boast US$883.9m more liquid assets than total liabilities.
This short term liquidity is a sign that MercadoLibre could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, MercadoLibre boasts net cash, so it's fair to say it does not have a heavy debt load! 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year MercadoLibre managed to grow its revenue by 37%, to US$1.8b. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is MercadoLibre?
Although MercadoLibre had negative earnings before interest and tax (EBIT) over the last twelve months, it made a statutory profit of US$8.8m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Keeping in mind its 37% revenue growth over the last year, we think there's a decent chance the company is on track. There's no doubt fast top line growth can cure all manner of ills, for a stock. For riskier companies like MercadoLibre I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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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