We Think Criteo (NASDAQ:CRTO) Can Manage Its Debt With Ease

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Criteo S.A. (NASDAQ:CRTO) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Criteo

What Is Criteo's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Criteo had US$5.02m of debt, an increase on US$4.28m, over one year. But it also has US$278.1m in cash to offset that, meaning it has US$273.1m net cash.

How Strong Is Criteo's Balance Sheet?

We can see from the most recent balance sheet that Criteo had liabilities of US$995.0m falling due within a year, and liabilities of US$138.7m due beyond that. On the other hand, it had cash of US$278.1m and US$763.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$92.1m.

Given Criteo has a market capitalization of US$2.14b, it's hard to believe these liabilities pose much 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, Criteo also has more cash than debt, so we're pretty confident it can manage its debt safely.

Although Criteo made a loss at the EBIT level, last year, it was also good to see that it generated US$137m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Criteo 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Criteo 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 year, Criteo generated free cash flow amounting to a very robust 93% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Criteo has US$273.1m in net cash. The cherry on top was that in converted 93% of that EBIT to free cash flow, bringing in US$128m. So we don't think Criteo's use of debt is risky. 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 2 warning signs with Criteo , and understanding them should be part of your investment process.

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.