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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.' 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. As with many other companies Euronet Worldwide, Inc. (NASDAQ:EEFT) makes use of debt. But should shareholders be worried about its use of debt?
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. 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 step when considering a company's debt levels is to consider its cash and debt together.
What Is Euronet Worldwide's Debt?
The image below, which you can click on for greater detail, shows that at June 2021 Euronet Worldwide had debt of US$1.18b, up from US$1.10b in one year. But on the other hand it also has US$1.56b in cash, leading to a US$382.4m net cash position.
How Healthy Is Euronet Worldwide's Balance Sheet?
According to the last reported balance sheet, Euronet Worldwide had liabilities of US$1.62b due within 12 months, and liabilities of US$1.38b due beyond 12 months. Offsetting these obligations, it had cash of US$1.56b as well as receivables valued at US$138.6m due within 12 months. So it has liabilities totalling US$1.30b more than its cash and near-term receivables, combined.
Since publicly traded Euronet Worldwide shares are worth a total of US$7.16b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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.
Importantly, Euronet Worldwide's EBIT fell a jaw-dropping 53% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. 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 Euronet Worldwide'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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Happily for any shareholders, Euronet Worldwide actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
While Euronet Worldwide does have more liabilities than liquid assets, it also has net cash of US$382.4m. And it impressed us with free cash flow of US$151m, being 103% of its EBIT. So we don't have any problem with Euronet Worldwide's use of debt. 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. We've identified 1 warning sign with Euronet Worldwide , and understanding them should be part of your investment process.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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.
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