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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Meta Platforms, Inc. (NASDAQ:META) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Meta Platforms

What Is Meta Platforms's Debt?

The image below, which you can click on for greater detail, shows that at June 2023 Meta Platforms had debt of US$18.4b, up from none in one year. However, it does have US$53.4b in cash offsetting this, leading to net cash of US$35.1b.

A Look At Meta Platforms' Liabilities

Zooming in on the latest balance sheet data, we can see that Meta Platforms had liabilities of US$29.9b due within 12 months and liabilities of US$42.7b due beyond that. Offsetting this, it had US$53.4b in cash and US$12.5b in receivables that were due within 12 months. So its liabilities total US$6.70b more than the combination of its cash and short-term receivables.

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$762.6b 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!

But the bad news is that Meta Platforms has seen its EBIT plunge 12% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Meta Platforms 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, Meta Platforms recorded free cash flow worth 77% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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$35.1b in net cash. And it impressed us with free cash flow of US$24b, being 77% of its EBIT. 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. For instance, we've identified 2 warning signs for Meta Platforms that you should be aware of.

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.