Meta Platforms (NASDAQ:META) Has A Pretty Healthy Balance Sheet

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Meta Platforms, Inc. (NASDAQ:META) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Meta Platforms

What Is Meta Platforms's Net Debt?

As you can see below, at the end of March 2023, Meta Platforms had US$9.93b of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds US$37.4b in cash, so it actually has US$27.5b net cash.

How Healthy Is Meta Platforms' Balance Sheet?

According to the last reported balance sheet, Meta Platforms had liabilities of US$25.4b due within 12 months, and liabilities of US$34.3b due beyond 12 months. Offsetting these obligations, it had cash of US$37.4b as well as receivables valued at US$11.0b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$11.2b.

Having regard to Meta Platforms' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$671.5b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Meta Platforms boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Meta Platforms if management cannot prevent a repeat of the 24% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Meta Platforms 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 70% 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 it is always sensible to look at a company's total liabilities, it is very reassuring that Meta Platforms has US$27.5b in net cash. The cherry on top was that in converted 70% of that EBIT to free cash flow, bringing in US$18b. So we don't have any problem with Meta Platforms's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Meta Platforms .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.