Is Meta Platforms (NASDAQ:META) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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, Meta Platforms, Inc. (NASDAQ:META) does carry 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. 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.

Check out our latest analysis for Meta Platforms

What Is Meta Platforms's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Meta Platforms had US$18.4b of debt, an increase on US$9.92b, over one year. However, its balance sheet shows it holds US$65.4b in cash, so it actually has US$47.0b net cash.

How Healthy Is Meta Platforms' Balance Sheet?

The latest balance sheet data shows that Meta Platforms had liabilities of US$32.0b due within a year, and liabilities of US$44.5b falling due after that. On the other hand, it had cash of US$65.4b and US$16.2b worth of receivables due within a year. So it actually has US$5.12b more liquid assets than total liabilities.

This state of affairs indicates that Meta Platforms' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$1.23t company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Meta Platforms has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Meta Platforms grew its EBIT by 50% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Meta Platforms 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Meta Platforms may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Meta Platforms produced sturdy free cash flow equating to 78% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Meta Platforms has net cash of US$47.0b, as well as more liquid assets than liabilities. And we liked the look of last year's 50% year-on-year EBIT growth. So is Meta Platforms'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. We've identified 1 warning sign with Meta Platforms , 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.