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

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

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

See our latest analysis for MercadoLibre

How Much Debt Does MercadoLibre Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 MercadoLibre had US$5.27b of debt, an increase on US$4.40b, over one year. However, it does have US$6.67b in cash offsetting this, leading to net cash of US$1.41b.

How Healthy Is MercadoLibre's Balance Sheet?

According to the last reported balance sheet, MercadoLibre had liabilities of US$14.3b due within 12 months, and liabilities of US$4.31b due beyond 12 months. On the other hand, it had cash of US$6.67b and US$9.05b worth of receivables due within a year. So its liabilities total US$2.90b more than the combination of its cash and short-term receivables.

Of course, MercadoLibre has a titanic market capitalization of US$97.4b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, MercadoLibre boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that MercadoLibre saw its EBIT decline by 4.9% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine MercadoLibre's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Happily for any shareholders, MercadoLibre actually produced more free cash flow than EBIT over the last three years. 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$1.41b. The cherry on top was that in converted 239% of that EBIT to free cash flow, bringing in US$6.2b. So we don't think MercadoLibre's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of MercadoLibre's earnings per share history for free.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.