Is MercadoLibre (NASDAQ:MELI) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that MercadoLibre, Inc. (NASDAQ:MELI) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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.

See our latest analysis for MercadoLibre

What Is MercadoLibre's Debt?

As you can see below, at the end of December 2020, MercadoLibre had US$1.39b of debt, up from US$808.1m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$2.46b in cash, so it actually has US$1.08b net cash.

How Healthy Is MercadoLibre's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that MercadoLibre had liabilities of US$3.64b due within 12 months and liabilities of US$1.24b due beyond that. Offsetting this, it had US$2.46b in cash and US$1.38b in receivables that were due within 12 months. So it has liabilities totalling US$1.04b more than its cash and near-term receivables, combined.

Having regard to MercadoLibre's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$71.4b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, MercadoLibre boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, MercadoLibre turned things around in the last 12 months, delivering and EBIT of US$128m. 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 MercadoLibre 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 company can only pay off debt with cold hard cash, not accounting profits. MercadoLibre 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. Happily for any shareholders, MercadoLibre actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

We could understand if investors are concerned about MercadoLibre's liabilities, but we can be reassured by the fact it has has net cash of US$1.08b. And it impressed us with free cash flow of US$935m, being 733% of its EBIT. So we don't think MercadoLibre's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that MercadoLibre is showing 2 warning signs in our investment analysis , and 1 of those is significant...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. 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.
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