Is Monster Beverage (NASDAQ:MNST) A Risky Investment?

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, Monster Beverage Corporation (NASDAQ:MNST) does carry debt. But is this debt a concern to shareholders?

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When Is Debt Dangerous?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Monster Beverage's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Monster Beverage had US$374.0m of debt, an increase on none, over one year. But on the other hand it also has US$1.53b in cash, leading to a US$1.16b net cash position.

A Look At Monster Beverage's Liabilities

The latest balance sheet data shows that Monster Beverage had liabilities of US$1.10b due within a year, and liabilities of US$663.9m falling due after that. Offsetting these obligations, it had cash of US$1.53b as well as receivables valued at US$1.22b due within 12 months. So it actually has US$987.6m more liquid assets than total liabilities.

Having regard to Monster Beverage's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$56.3b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Monster Beverage boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Monster Beverage

The good news is that Monster Beverage has increased its EBIT by 3.3% 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 ultimately the future profitability of the business will decide if Monster Beverage 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Monster Beverage 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, Monster Beverage recorded free cash flow worth 67% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 investigate a company's debt, in this case Monster Beverage has US$1.16b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 67% of that EBIT to free cash flow, bringing in US$1.6b. So is Monster Beverage's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Monster Beverage you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.