Does Coupang (NYSE:CPNG) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Coupang, Inc. (NYSE:CPNG) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Coupang

What Is Coupang's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Coupang had debt of US$1.60b, up from US$1.14b in one year. But it also has US$5.82b in cash to offset that, meaning it has US$4.23b net cash.

A Look At Coupang's Liabilities

According to the last reported balance sheet, Coupang had liabilities of US$8.19b due within 12 months, and liabilities of US$3.88b due beyond 12 months. Offsetting these obligations, it had cash of US$5.82b as well as receivables valued at US$517.0m due within 12 months. So it has liabilities totalling US$5.73b more than its cash and near-term receivables, combined.

Of course, Coupang has a titanic market capitalization of US$42.5b, 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. While it does have liabilities worth noting, Coupang also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact Coupang's saving grace is its low debt levels, because its EBIT has tanked 20% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 Coupang 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 Coupang 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, Coupang actually produced more free cash flow than EBIT over the last two years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

Although Coupang's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$4.23b. The cherry on top was that in converted 361% of that EBIT to free cash flow, bringing in US$920m. So we don't have any problem with Coupang's use of debt. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Coupang insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

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.