These 4 Measures Indicate That Monster Beverage (NASDAQ:MNST) Is Using Debt Safely

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. We can see that Monster Beverage Corporation (NASDAQ:MNST) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for Monster Beverage

How Much Debt Does Monster Beverage Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Monster Beverage had US$748.7m of debt, an increase on none, over one year. But it also has US$1.56b in cash to offset that, meaning it has US$816.0m net cash.

How Healthy Is Monster Beverage's Balance Sheet?

The latest balance sheet data shows that Monster Beverage had liabilities of US$1.16b due within a year, and liabilities of US$1.03b falling due after that. Offsetting these obligations, it had cash of US$1.56b as well as receivables valued at US$1.35b due within 12 months. So it actually has US$723.9m 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 while it's hard to imagine that the US$49.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Monster Beverage has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Monster Beverage grew its EBIT at 14% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Monster Beverage'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. During the last three years, Monster Beverage produced sturdy free cash flow equating to 62% of its EBIT, about what we'd expect. 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$816.0m in net cash and a decent-looking balance sheet. So is Monster Beverage's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Monster Beverage you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.