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

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.' 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. Importantly, MercadoLibre, Inc. (NASDAQ:MELI) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for MercadoLibre

How Much Debt Does MercadoLibre Carry?

As you can see below, MercadoLibre had US$4.39b of debt at September 2023, down from US$4.64b a year prior. However, its balance sheet shows it holds US$5.49b in cash, so it actually has US$1.10b net cash.

A Look At MercadoLibre's Liabilities

The latest balance sheet data shows that MercadoLibre had liabilities of US$10.3b due within a year, and liabilities of US$3.08b falling due after that. On the other hand, it had cash of US$5.49b and US$5.87b worth of receivables due within a year. So its liabilities total US$2.02b more than the combination of its cash and short-term receivables.

Given MercadoLibre has a humongous market capitalization of US$69.7b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, MercadoLibre boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, MercadoLibre grew its EBIT by 168% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. 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. While MercadoLibre 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 last three years, MercadoLibre actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that MercadoLibre has US$1.10b in net cash. And it impressed us with free cash flow of US$4.3b, being 193% of its EBIT. So we don't think MercadoLibre's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in MercadoLibre, you may well want to click here to check an interactive graph of its earnings per share history.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.