World Fuel Services (NYSE:INT) Takes On Some Risk With Its Use Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 World Fuel Services Corporation (NYSE:INT) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for World Fuel Services

What Is World Fuel Services's Net Debt?

You can click the graphic below for the historical numbers, but it shows that World Fuel Services had US$473.6m of debt in September 2020, down from US$671.1m, one year before. But on the other hand it also has US$572.7m in cash, leading to a US$99.1m net cash position.

How Strong Is World Fuel Services' Balance Sheet?

According to the last reported balance sheet, World Fuel Services had liabilities of US$1.56b due within 12 months, and liabilities of US$915.5m due beyond 12 months. Offsetting this, it had US$572.7m in cash and US$1.24b in receivables that were due within 12 months. So it has liabilities totalling US$655.7m more than its cash and near-term receivables, combined.

This deficit isn't so bad because World Fuel Services is worth US$2.03b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, World Fuel Services boasts net cash, so it's fair to say it does not have a heavy debt load!

Shareholders should be aware that World Fuel Services's EBIT was down 32% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. 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 World Fuel Services 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 company can only pay off debt with cold hard cash, not accounting profits. While World Fuel Services 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. In the last three years, World Fuel Services's free cash flow amounted to 49% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While World Fuel Services does have more liabilities than liquid assets, it also has net cash of US$99.1m. So while World Fuel Services does not have a great balance sheet, it's certainly not too bad. 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. Like risks, for instance. Every company has them, and we've spotted 4 warning signs for World Fuel Services (of which 1 is a bit unpleasant!) you should know about.

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.

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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. 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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