These 4 Measures Indicate That MercadoLibre (NASDAQ:MELI) Is Using Debt Safely

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that MercadoLibre, Inc. (NASDAQ:MELI) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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?

The chart below, which you can click on for greater detail, shows that MercadoLibre had US$4.55b in debt in June 2024; about the same as the year before. However, its balance sheet shows it holds US$6.89b in cash, so it actually has US$2.34b net cash.

How Strong Is MercadoLibre's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that MercadoLibre had liabilities of US$12.9b due within 12 months and liabilities of US$3.46b due beyond that. On the other hand, it had cash of US$6.89b and US$7.80b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.69b.

This state of affairs indicates that MercadoLibre's 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$100.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, MercadoLibre also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, MercadoLibre grew its EBIT by 35% over the last twelve months, and that growth will make it easier to handle its debt. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that MercadoLibre has US$2.34b in net cash. The cherry on top was that in converted 232% of that EBIT to free cash flow, bringing in US$5.6b. So is MercadoLibre's debt a risk? It doesn't seem so to us. 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.