Costco Wholesale (NASDAQ:COST) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Costco Wholesale Corporation (NASDAQ:COST) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Costco Wholesale

What Is Costco Wholesale's Debt?

You can click the graphic below for the historical numbers, but it shows that Costco Wholesale had US$5.76b of debt in February 2025, down from US$6.95b, one year before. However, it does have US$13.2b in cash offsetting this, leading to net cash of US$7.40b.

How Healthy Is Costco Wholesale's Balance Sheet?

According to the last reported balance sheet, Costco Wholesale had liabilities of US$37.0b due within 12 months, and liabilities of US$10.6b due beyond 12 months. Offsetting these obligations, it had cash of US$13.2b as well as receivables valued at US$3.06b due within 12 months. So it has liabilities totalling US$31.4b more than its cash and near-term receivables, combined.

Of course, Costco Wholesale has a titanic market capitalization of US$455.5b, so these liabilities are probably manageable. 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, Costco Wholesale boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Costco Wholesale has increased its EBIT by 9.6% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Costco Wholesale'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 Costco Wholesale 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 most recent three years, Costco Wholesale recorded free cash flow worth 70% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Costco Wholesale has US$7.40b in net cash. The cherry on top was that in converted 70% of that EBIT to free cash flow, bringing in US$6.9b. So we don't think Costco Wholesale's use of debt is risky. Another factor that would give us confidence in Costco Wholesale would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

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.